The question, then, is: how should Ukraine deal with informality and the lack of workplace protections? Well, it could consider the following:
1) Raise wages to encourage legal employment. The level of minimum monthly wage in Ukraine is currently €175, compared with €312 in Bulgaria. While many countries recommend that the minimum wage should be lowered to encourage legal employment, in Ukraine these recommendations are pointless. In this context we have a similar situation with Bulgaria, where small wages go hand in hand with a large informal economy. The draft law could have even made Ukrainians earn less following a reduction in surcharges for overtime. Studies show that the greater the share of the population living below the national poverty line, the higher the level of informal employment. The minimum wage should be increased in order to encourage employees to take up official employment.
2) Reshape Ukraine’s tax policy. The use of pseudo self-employment in Ukraine is driven by high (in the opinion of the country’s business class) social contributions rather than rigid labour market regulations. The big gap between taxation of wages and self-employed income leads to the use of civil contracts, rather than official employment. The taxes for using civil contracts should be raised. It is also important to release the lowest salaries (e.g. 150% of minimum wage) from taxation.
3) Introducing an integrated approach to enforcement. Ukraine’s shadow economy cannot be explained as a consequence of the country’s strict labour legislation. All factors that can reduce informal employment fall into four groups: (a) tax policy, including social security contributions, (b) labour regulations, (c) broader business regulations, and (d) institutional reforms, including sanctions for non-compliance. Higher levels of informal employment result from the under-regulation, rather than over-regulation, of economies and a lack of state intervention to protect workers from poverty. The start of a workplace inspection campaign at the beginning of this year (without waiting for the labour reform) can be seen as a positive signal. But the sanctions should be tightened (today the fine for using undeclared work in Ukraine is about €1,740 compared with €7,000 in Poland). We should support programmes to increase the employability of vulnerable categories of workers. Employers will be incentivised to employ people legally if they want to receive state compensation for employing or training young people, disabled workers and employees with family obligations.
Final lessons
The EU’s current social policy underlines the importance not only of fighting informality, but also the quality of work. In other words, reforms should not result in more precarious jobs. But the Ukrainian government tried to move in the opposite direction. Their attempt at reform would have denied access to decent work, which includes wages that enable workers to support their household, contractual stability, and protection from unjustified termination of employment.
Liberalisation and deregulation is not the answer to every challenge. In my view, the Zelensky team’s innovations would have encouraged emigration, rather than moving people from the shadow economy into employment. In similar situations with informal economies, such as Croatia, liberalising workplace legislation has not led to a reduction in the informal economy – instead, youth unemployment has decreased, but only as a result of emigration.
By themselves, liberal labour reforms can’t eliminate the problem of undeclared work. Сareless steps could bring only harm, but Ukraine’s new government still has a chance to reconfigure how it combats the shadow economy.
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Vitaliy Dudin | Radio Free (2020-03-09T23:00:00+00:00) In Ukraine, liberalisation will not solve the shadow economy. Retrieved from https://www.radiofree.org/2020/03/09/in-ukraine-liberalisation-will-not-solve-the-shadow-economy/
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