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Ukraine's new struggle for labor and wages unshadowing

Author : Yuriy Hryhorenko

Ukraine’s Cabinet has made another attempt to bring to light the envelope salaries and unofficially employed workers
13:10, 18 September 2018

Ukraine’s Cabinet has made another attempt to bring to light the envelope salaries and unofficially employed workers. Experts are sure that this will not lead to a breakthrough, as administrative measures, inspections, fines, and explanatory campaigns cannot change the situation

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Dreams about the unshadowing

September 5, Cabinet of Ministers has adopted an order "On measures aimed at unshadowing of the population’s employment." According to this order, from October 5, business checks will be conducted to fix the employment of the workers. An awareness-raising campaign will also be conducted within the framework of the events. The composition of performers looks quite impressive - the State Service for Labor, State Fiscal Service, the Pension Fund, the National Police, as well as other central bodies of executive power and local self-government. The authorities are taking a new round of measures in an attempt to fill the state budget.

After Prime Minister Volodymyr Groysman's statement that the non-receipt of IMF loan will lead to a default, the situation with filling the budget seems to be critical. Especially in the light of huge payments on state debt and the state budget deficit.

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According to the State Statistics Service, as of July 1, the number of unemployed in Ukraine was 303.9 thousand, whereas real unemployment according to the methodology of the International Labor Organization is estimated at 1.7 million people. According to various estimates, another 3-5 million people work unofficially inside the country, some of whom become seasonal labor migrants. According to the Ministry of Social Policy, the level of shadow employment in Ukraine in 2017 has decreased by 8% - from 4 million to 3.7 million people.

Even according to official data, a third of the Ukrainian economy is in shadow. This indicator, according to the Ministry of Economic Development, in the 1st quarter of this year amounted to 33% of the official GDP, which is 4% less compared to the same period in 2017. The most "shadowed" branches of the economy in terms of informal employment are traditionally the agro-industrial complex, trade, construction, and public catering.

The controlling bodies are trying to find the informal employees. For 7 months of the current year, the State Fiscal Service has revealed 4.2 thousand people who worked without formalization of their labor relations. As a result, the offenders were credited with almost 21 million USD of personal income tax and 6 million USD of a single contribution. Last year, the State Fiscal Service and the State Service for Labor has revealed about 10 thousand unofficial workers. However, these figures are just a drop in the bucket against the background of millions of unofficial employees.

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However, fines for unofficial employees are quite impressive: the last 2 years they have grown due to the increase in the minimum wage from 114 to 132 USD in 2018. So, the inspector's non-admission to the inspection costs 13 thousand USD, and the admission of an unformed employee to work is 4 thousand USD (for each employee).

It is noteworthy that the State Fiscal Service has found some violations in 47% of the checked subjects. That is, the tests give their results, but they have checked too few enterprises and organizations to fix more significant results and show a greater effect of the unshadowing of labor relations and salaries.

Currently, there is a moratorium on inspections of small and medium businesses until 2019 but it does not apply to the State Fiscal Service and the State Service for Labor.

Effect of the inspections

The inspection means checking the production, commercial, and office premises, interviewing the employees. Despite the very broad powers of the labor inspectors, it is difficult for them to gather evidence about the violation of the registration procedure or to reveal the envelope salary and unofficial employees. The only exception is when the employee himself declares these facts, but such cases are very rare.

Related: Unemployment rate remains at 1,3% in June

At different times, different governments have considered the unshadowing of the economy as a whole and salaries, in particular, as a source of replenishment of the budget. Various measures have been proposed, but all attempts to force entrepreneurs to "whitewash" their wages until recently did not lead to any significant results. It is important to understand that the administrative measures and pressure of the controlling bodies have not yielded the necessary results before. Therefore, we can predict that the current attempt to unshadow the labor relations is doomed to failure.

Experts do not believe that the strengthened inspections and control would achieve the desired results. "Many times, they accepted similar programs and resolutions, but all of them ended in failure: they can only defuse envelope salaries by economic methods. If they do it in a violent way, then part of the business will run away “into the shadow,” while the other part will simply include additional costs in the price of goods, and wholesale/retail prices will rise," stresses Olexandr Okhrimenko, president of the Ukrainian Analytical Center.

Related: Ukraine sees unemployment rate climb by 1.3% in February 2018

"Activating inspections will force employers to pay, which will lead to replenishment of the state treasury in one case, and inspectors' pockets in the other. But this will not solve the unofficial employment issue," adds Maria Felmetsger, lawyer of the Juscutum legal engineering company.

Large companies, which are of great interest to most of the supervisory bodies, rarely allow themselves to use primitive schemes when paying employees. "At the same time, for many small companies, the optimization of labor costs is a survival dilemma: they either pay employees a market wage (in envelopes), trying to save on other payments, or optimize the number of staff, but pay all the mandatory payments. There is a doubt that fines will create a civilized labor market in small business," Viktor Shulik, director of the market research department of the IBI-Rating rating agency, said.

What is next?

In order to unshadow the salaries, business needs a clear understanding that, following the law, it will receive security guarantees, and employees will get the social guarantees. So far neither business nor workers have a sense that the state can guarantee something and observe this in the long term.

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According to Okhrimenko, the main problem of the envelope wages is the absence of a civilized labor market. According to the Ukrainian labor laws, a person could be easily employed but it is very difficult to fire her. Therefore, business often resorts to envelope wages, not because of high taxes, but because it is easier to manage the employees.

"It's easier to change the salary level based on the current business situation, to fire a person and to increase labor productivity. Generally, envelope wage is an effective tool for managing the employees, and it is difficult to break this system," Okhrimenko adds.

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Viktor Shulik is persuaded that the increasing competition in the labor market by employers is an important incentive for the legalization of labor relations. Especially considering the shortage of employees of working specialties due to seasonal migration abroad. But the maximum level of payments to employees is often limited to the financial capacity of enterprises themselves. So, in order to pay an employee 360 USD a month, the salary should be 440 USD (18% of personal income tax and 1.5% military duty). In addition, for this amount, the employer must add another 22%.

At the same time, the influence of the current system of social protection is no less important: many prefer to work unofficially, as this allows receiving subsidies for utility payments or unemployment benefits.

Certainly, significant fines for unofficial employment and envelope salaries are a deterrent to the shadowing of the labor market, while at the same time; the whip method cannot solve this deep problem. "One-time payment for “solving the problem” will cost employers less than paying fines and legalizing employment, which will lead to increased corruption in this area," Maria Felmetsger notes.

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According to her, a comprehensive approach is needed for the unshadowing of the employment relations, including raising the level of the minimum wage, stabilizing the economic situation in the country, granting benefits to businesses in the form of tax holidays, reducing the tax burden, etc.

Read the original text at 112.ua.

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