Envelope Wage Practices: Underlying Motivations from the Perspective of Workers

Given the numerous economic and societal consequences of undeclared work, there has been growing interest in understanding its causes so that it can be tackled. This has been particularly the case since the onset of the economic crisis, which has resulted in the fight against tax evasion moving higher up the agenda. To contribute to advancing understanding of the undeclared economy, this thesis seeks to explain the motivations of workers for participating in quasi-formal employment, which is one of the least discussed types of noncompliance. This practice is based on a formal employer and a formal worker agreeing to declare only one part of the wage, while the rest is given as an undeclared cash payment in order to evade tax liabilities. Based on quantitative data from approximately 25,000 individuals surveyed during the period 2007-2015 around Europe and 39 qualitative interviews with workers and representatives of relevant institutions in Croatia, this thesis reveals that the phenomenon is more complex than was previously assumed. Although a proportion of workers agree to this illegitimate wage arrangement simply to escape from unemployment and are exploited by employers, the study shows that this cannot be generalised to the whole quasi-formal workforce. It appears that workers are primarily social agents who heavily base their decisions on the behaviour of other taxpayers and the perceived quality of the psychological contract between the state and citizens. Moreover, many workers see take-home pay as the ultimate goal of employment and accordingly voluntarily agree to this wage arrangement if they believe they can earn more when being under-declared. Apart from its theoretical contribution to understanding workers’ motivations for accepting envelope wages, the thesis thus also has a practical significance. It demonstrates that tackling this practice requires an indirect policy approach that not only increases the credibility of the state apparatus but also improves the tax morale of citizens.