What is organized sector

Information sheet for the shadow economy

Types and measurement of the shadow economy as well as their economic damage

"A bus company is being raided. There are suspicions of illicit work on a large scale." These or similar headlines come across the attentive user of the news media almost every day. Undeclared work - a term that is on everyone's lips. But what exactly is illegal work? First of all, most people intuitively associate the forbidden, bad or disastrous with the term. But the term undeclared work is really not outlined. In connection with undeclared work, the terms shadow economy, underground, secondary or parallel economy, illegal employment or the informal sector often appear.

What is undeclared work?

The term illegal work originally comes from the German craft regulations. Undeclared work is when a craftsman carries out a craft activity without having a license and without being registered in the craft register. Today, when people think of illegal work, they primarily think of activities that are performed in disregard of the statutory reporting and reporting obligations to the tax office and social security. The "Act to Combat Undeclared Work" of February 6, 1995 regulates which activities are classified as undeclared work. Accordingly, it is about the exercise of services or works to a considerable extent without

  • to have fulfilled his obligation to notify the labor or social welfare office,
  • to operate a business without a business registration or travel business card or
  • to practice a craft without being registered in the craft register.

Organized undeclared work is a particular problem, because systematic enrichment takes place here at the expense of the solidarity community. Undeclared work also includes work on which the functioning of a society can largely depend. These activities are to be assessed positively, such as housework, voluntary work or free help for neighbors. The term undeclared work or shadow economy describes all activities that contribute to the overall economic value added, but are not shown in the official economic statistics.

Types of shadow economy

The shadow economy can usually be subdivided into the self-sufficiency economy and the underground economy. Domestic and public self-sufficiency are included in the self-sufficiency economy. These include, for example, the voluntary fire brigades, neighborhood help, domestic activities, private vegetable and fruit growing and self-help groups. These activities are legal and are usually not taxed. Economic damage only arises if mandatory duties such as taxes or social security contributions are not paid. This is e.g. B. the case if a domestic help is employed in the house and this is not registered. It is estimated that around 90 percent of domestic help employment relationships are not reported and are therefore illegal. Undeclared work, black trafficking and even criminal acts such as embezzlement, extortion, illegal gambling or pimping are counted as part of the underground economy. The unofficial markets for which there are actually official markets are designated as black market. This form of (black) trade has its heyday especially in times of war and crisis, when the state tries to distribute the scarce goods to the population by issuing vouchers. You can have this experience in everyday life when all tickets for a coveted football match or concert are sold out and black marketeers try to sell overpriced tickets.

Measurement of the shadow economy and economic damage

Undeclared work causes economic damage because the state and the social security funds are deprived of income. In addition, legal employment is jeopardized because undeclared work is cheaper. It is extremely difficult to estimate how great the economic damage caused by undeclared work is. Legal undeclared work, such as B. In-house work on house construction can be determined through surveys. Since there is a risk of high fines, most illegal employment relationships are kept secret and recording becomes all the more difficult. Direct and indirect measurement methods are used to determine the extent of undeclared work. Indirect measurement methods use indicators such as the demand for cash. One procedure assumes that after tax increases, the demand for cash will increase because legal work is then preferentially transformed into illegal employment. Transactions in the shadow economy are usually settled in cash. In this way, the estimated cash demand can be compared with the actual demand without a tax increase. Conversion allows conclusions to be drawn about the share of the shadow economy in the gross domestic product. According to such measurement methods and model calculations, the damage caused by undeclared work is calculated and an estimate is made of how much additional income the state would have and how much additional regular employment would be possible. Often, additional tax revenues in the hundreds of millions are mentioned.
Since January 1, 2004, the Financial Control of Undeclared Work has been responsible in Germany for combating illegal employment and undeclared work. Problematic in the fight against illegal work are the immense costs of the search apparatus and the financial administration. Effort and benefit should be in a suitable ratio. However, it must be noted here that converting illegal employment into regular work would mean that some activities would no longer be possible for the individual. After all, illegal work also has positive effects on the official economic cycle. If a landlord wants to re-cover his roof, for example, he has to raise large sums of money for craftsmen and the material. If the available financial means are only sufficient for the building material, however, he has the choice of not renewing his roof or of asking friends and neighbors whether they will help. As a result, the state loses tax revenue and social security contributions from the craftsmen who may be employed, but the builder can at least purchase new building materials. The local retail trade and the state benefit from this by collecting VAT.

The informal sector

Undeclared work in developing countries largely contributes to the informal sector. The informal sector is the alternative employment sector for predominantly marginalized sections of the population (fringe groups), mainly in less and medium-developed countries. It differs from the well-organized and regulated forms of economic activity in the formal sector. There are hardly any formalized employment relationships, which in practice mean no minimum wage, social security or adequate occupational health and safety. The mostly small production units are almost completely beyond the control of the state. Often family members are employed. Further characteristics are low or nonexistent qualification of the workforce, labor-intensive production and low use of technology and capital. In developing countries, the most common fields of activity are informal services such as shoe cleaning, transport (e.g. by rickshaw) and the manufacture and sale of own products in local markets. Much of the population in underdeveloped countries subsists entirely on jobs in the informal sector. Thus, illegal employment in these countries is given a different meaning than in, for example, the Federal Republic of Germany.

Source: Geography Information Center
Author: Mirko Ellrich
Publisher: Klett
Location: Leipzig
Source date: 2005
Page: www.klett.de
Processing date: 05/01/2012

Undeclared work, shadow economy

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