Tax evasion through unreported employment: Empirical evidence from the Republic of Serbia

Abstract

Unreported employment represents a significant mechanism of tax evasion in transition and post-transition economies, hindering the economic security of a country. Unreported workers are not declared to the national tax authorities and are paid on the cash-in-hand basis, thus evading both labour tax and social security contributions. In this way, labour rights and labour security are violated. The main objective of the paper is to examine the extent of unreported employment in Serbia and to analyse the sectoral and geographical structure of it. The empirical research is conducted on the basis of data from the Ministry of Labour, Employment, Veteran and Social Affairs. The results indicate that almost 8,000 cases of unreported employment were detected during the four-years period, involving more than 14,000 unreported workers. In nearly 70% of all cases, only one unreported worker was detected, though in some cases the number of detected unreported workers was higher than fifty. Although most companies in Serbia are registered in manufacturing and trade industries, accommodation and food service activities and construction are leading industries in terms of unreported employment. In addition, the largest ratio of unreported workers per case is calculated for the construction industry. Regarding the geographical structure, the region of Šumadija and Western Serbia has the largest number of both cases of unreported employment and detected unreported workers.