Undeclared work increases

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A series of studies published in 2003 indicates that Italy’s 'hidden' or irregular economy continues to grow. According to the most recent figures, 3.5 million workers out of a total labour force of around 23.5 million are irregular, a rate of around 15%. The growth of undeclared work is matched by that of the hidden economy, which is worth between 15.2% and 16.9% of GDP. The hidden economy is particularly important in the South and in certain economic sectors. The Cgil trade union confederation has called for new measures to deal with the problem.

The 'hidden' economy (economia sommersa), involving 'irregular' work, should be distinguished from the 'illegal' economy (economia illegale) and the 'informal' economy (economia informale) (IT0205105F). Illegal activities are those prohibited by law or those whereby non-authorised personnel produce and sell goods or services (which are not illegal in themselves). The informal sector comprises production units with a low organisational level, with little or no division between capital and labour, and family-based or personal employment relationships. The hidden economy consists of legal activities which are unknown to the public authorities for statistical reasons or because of deliberate action taken by firms to conceal their activities from the social security institutions for the following reasons:

1. tax evasion (of income tax or other duties);
2. evasion of social security contributions;
3. non-observance of collectively agreed regulations (on minimum pay levels, working hours etc) and of the law on workplace health and safety; and
4. lack of administrative authorisation or failure to respond to statistical questionnaires.

The hidden economy therefore comprises activities deliberately intended to violate regulations but which are not in themselves illegal. Activities thus belong to the hidden economy if they involve an attempt to avoid (wholly or partly) taxes, social security contributions, contractual obligations, statutory pay levels, safety standards, or environmental and social responsibilities, in order to reduce production costs (points 1, 2 and 3 in the list above); or they may belong to the so-called 'hidden statistical economy' (sommerso statistico) (point 4) because of their failure to provide statistics and/or because of the inefficiency of the statistical system itself (the Italian productive system has an extremely high number of very small firms which makes it difficult to compile an exhaustive database of businesses in the country). However, with a new methodology adopted by the Central Statistics Office (Istituto Centrale di Statistica, Istat), which is in line with that used at the European and international level, it is now possible to include the 'hidden statistical economy' in regular work and isolate the component of undeclared work attributable to the hidden economy.

Irregular work comprises the following four types of activity:

• continuous work activities not in compliance with the relevant regulations. This is irregular work in the strict sense, in that it involves workers employed in accordance with minimum regular standards but a large part of whose earnings are not declared to the tax or social security authorities (a proportion of actual pay, overtime, bonuses etc), entirely irregular employees (undeclared and paid totally 'off the books'), employees who receive pay to an amount less than that declared, and irregular self-employed workers and professionals;
• occasional work activities carried out by people who declare themselves non-active in that they are students, housewives or pensioners;
• work by non-resident and non-regular immigrants; and
• sundry work activities not declared to the tax authorities (this concerns second, irregular, jobs undertaken in addition to the main regular ones).

The Italian economic system is characterised by the importance of production activities which elude observation either by the tax authorities or by the social security institutes. This distinctive feature of Italy can in part be explained by the country’s extremely large number of small and medium-sized enterprises, the majority of which are of such small size that they can employ labour on conditions that flout the regulations. These firms can be divided into the following categories:

• entirely 'visible' firms which comply with the main provisions of the law but have a high propensity to evade and avoid tax and social security contributions, make excessive use of flexibility arrangements and outsourcing, and use pay systems which are in breach of collectively agreed provisions;
• firms which fulfil the minimum requirements for 'regularity', such as enrolment on the register of firms, but pay a proportion of their workforce 'off the books' and only formally comply with their statutory obligations;
• small firms (usually with between five and 10 employees) which are entirely irregular, often because their type of activity (services, building etc) does not require them to have visible premises; and
• micro-firms or individuals, with or without a value added tax code, operating in sectors where the type of demand (domestic work or personal care work) or the content of the activity (liberal professions, consultancy or self-employment) enables them to conceal their activities to a large extent.

Estimates of irregular work

Various surveys published in 2003 have estimated trends in Italy’s hidden economy. An Istat report analyses the period from 1992 to 2000 (L’occupazione non regolare nelle nuove stime di contabilità nazionale, Anni 1992-2002); a study by the Association for Development in the South of Italy (Associazione per lo sviluppo dell’industria nel Mezzogiorno, Svimez) considers the years from 1995 to 2001; and a study by the Social Investments Studies Centre (Centro Studi Investimenti Sociali, Censis) covers the period 1998-2002 (Tendenze generali e recenti dinamiche dell’economia sommersa in Italia, 1998-2002). All these studies highlight a slow but steady increase of irregular work in Italy over the past few years.

Istat estimates the worth of the hidden economy as oscillating between 15.2% and 16.9% of GDP in 2000, this being equivalent to between EUR 177 billion and EUR 197 billion. The growth of the hidden economy has been matched by an increase in irregular work, which now stands at a level among the highest in Europe. Some 3.5 million workers out of a total labour force of 23,452,000 are irregular, which is equivalent to 15%, and the level rises to 18% among employees. However, the weight of the hidden economy is not evenly distributed either geographically or sectorally.

The sectors most affected by irregular work, both in absolute and percentage terms, are those in which it is possible for inefficient production units to survive, or in which work activities are of low complexity, such as domestic or personal care services, building, agriculture, catering, tourism, and retailing - see table 1 below. Istat’s estimates for 2000 put the number of irregular workers in manufacturing at around 300,000, while fully 342,000 foreign workers irregularly employed in domestic services have applied for permits to stay following enactment of law 383/2001 on the regularisation of 'irregular' work (IT0205105F). Irregular employment, in fact, mainly affects non-EU immigrants working in low-skilled sectors, and of these, according to Istat, there are 516,0000 in the agricultural and construction sectors alone (which have not been affected by the recent amnesty offered by law 383, in that it was used mainly by workers in personal services and manufacturing to regularise their positions).

Source: Censis, 2002.

With regard to the geographical distribution of irregular employment - see table 2 below - the figures show that the phenomenon is especially widespread in southern Italy, where one in every five workers is irregular, and which accounts for the entire increase in the hidden economy with a year on year increase of 0.5%. In the South, the hidden economy provides work for more than 1.5 million people, representing 23% of the working population, while in the Centre-North, where irregular workers number around 2 million, the percentage falls by half to 11.9%. The most evident differences are to be found in industry, where 19.5% of southern workers are employed 'off the books' in the South, compared with only 5.3% in the northern regions of the country. This can be explained by the substantial weight of the construction industry in the South. The majority of southern firms employing irregular labour are of small size, with low profitability, undertaking traditional activities along the supply chain, and located in areas with high levels of unemployment.

Source: Svimez calculations for 2001 based on ISTAT data.

Reactions

Law 383/2001, which provided tax and social security contribution incentives to encourage 'emergence' from irregular work, has to date elicited applications for regularisation from only 2,800 firms. This appears to be an unsatisfactory result compared with the size of the phenomenon, which places Italy among the European countries with the highest levels of irregular work. These poor results have induced the Ministry of Labour and Social Policy to propose the establishment of an extraordinary commission endowed with broad powers, including coordination of the police forces, in order to combat irregular work.

On the trade union side, the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil) has submitted a proposal which envisages: the creation of a national fund to support local 'emergence' plans - providing bonuses for workers who regularise their positions and pay off the contributions evaded - and financed out of the resources yielded by amnesties (according to the principle that the revenues from regularised illegalities should be used to prevent illegalities in the future); the expansion of inspection services; more stringent rules for contract procurement, subcontracting and the agricultural sector; and an inclusive strategy for immigration.

Commentary

Italy’s hidden economy increased substantially in the first half of the 1990s and remained steady thereafter, but not in all sectors. It has continued to grow in agriculture and in many branches of services, commerce and tourism in particular. Irregular employment varies markedly across the country, increasing as one moves southwards. Moreover, one-sixth (and the proportion is growing) of the workers concerned are non-EU immigrants.

Reducing the weight of the hidden economy and irregular work should be a priority goal of economic policy, also with a view to supporting 'regular' firms by eliminating forms of unfair competition, and to encouraging partly irregular ones to regularise their positions.

The introduction over the past 10 years of forms of work flexibility does not seem to have halted the spread of the phenomenon, an outcome which contradicts those who argued that a more flexible labour market would be the best way to combat the hidden economy.

On the other hand, measures such as the tax and construction amnesties introduced by the government have not proved effective. On the contrary, they have significantly encouraged irregularity and the spread of the hidden economy, besides causing irreparable damage to the quality of Italy’s environment. (Livio Muratore, Ires Lombardia)