Dissecting the illicit practice of wage underreporting: some evidence from Croatia

Abstract

Even though quasi-formal employment has become an integral part of European labour markets, not much is known about the functioning of this ingenious tax evasion scheme. To start to fill this gap, this paper elaborates the most important findings from qualitative interviews with 30 quasi-formal workers and 9 representatives of relevant institutions in Croatia. Among other important issues, this in-depth study, conducted during 2015 and 2016, aimed to explore the strategies that employers apply to ensure their workers’ collaboration, as well as the schemes through which they extract cash for the unreported portion of the wage. The study revealed that not only can this practice subsist independently from undeclared work, but in certain circumstances it can even rely on cash flows that are fully visible to the authorities. Furthermore, we show that many quasi-formal workers are actually happy with their employment due to the mistaken belief that they earn more money this way. In addition to its theoretical significance, this paper also provides valuable practical information that could assist the authorities in their fight against this phenomenon.