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This paper aims to evaluate the prevalence in Europe of a so far little discussed wage practice in which employers pay their declared employees two wages, one declared and the other an undeclared (“envelope”) wage.

To evaluate the pervasiveness of envelope wages in Europe, a 2007 Eurobarometer survey on undeclared work is reported involving 26,659 face‐to‐face interviews which included a section on whether employees are paid an additional envelope wage by their declared employer.

The finding is that one in 20 employees receive some of their wage from their employer as an undeclared “envelope wage” and on average this amounts to two‐fifths of their wage packet. This payment arrangement, however, is more prevalent in some businesses, places and populations than others. Smaller businesses and construction firms are more likely to pay envelope wages. Men, younger persons and the lower paid are more likely to receive such wages. And geographically, envelope wages are more common in East‐Central Europe, where such payments are more likely to be for regular employment hours, whilst in Continental Europe and Nordic countries envelope wages are less common and received more for overtime or extra work conducted.

Through an evaluation of its prevalence, this paper displays the need for action to tackle this illegitimate wage practice and briefly reviews a range of policy options and measures.

This is the first extensive evaluation of the commonality of envelope wages in Europe.

The purpose of this paper is to evaluate in the Baltic Sea region the prevalence of an illegitimate wage arrangement whereby formal employers pay their formal employees both an official declared wage as well as a supplementary undeclared (envelope) wage.

A 2007 Eurobarometer survey is reported that evaluates envelope wage practices in 27 European Union (EU) member states. This paper focuses upon the 4,031 face‐to‐face interviews conducted in four countries from the Baltic Sea region that are now member states of the EU, namely Estonia, Latvia, Lithuania and Poland.

Some one in eight formal employees in these four countries from the Baltic Sea region received an undeclared “envelope” wage from their formal employer during the past 12 months which on average amounted to 45 per cent of their gross wage packet. Although this practice is concentrated in smaller businesses, the construction industry, and amongst younger people, manual workers and lower income groups in these four countries, it is by no means confined to specific pockets of the economic landscape. Rather, it exists throughout these countries in all business types and employee groups.

The existence and commonality of envelope wages reveals the need to transcend the dichotomous depiction of formal and informal jobs as always separate and discrete and to recognise how they can be inextricably interwoven.

This paper outlines a range of potential policy measures for tackling envelope wages and calls for their piloting and evaluation.

The first cross‐national evaluation of the incidence and nature of envelope wages in the Baltic Sea region and what needs to be done to tackle this practice.

This paper aims to evaluate critically the validity of rival theorisations of the hidden economy that variously read this sphere as a leftover from a previous era, a by‐product of a new emergent form of capitalism, a complement to formal employment or an alternative to the formal economy. Until now, the common tendency among economic theorists has been to either universally privilege one theorisation over others, or to represent each theory as valid in different places.

To evaluate their validity to the city of Moscow, a survey is reported involving 313 face‐to‐face interviews with inhabitants conducted during 2005/2006.

The finding is that, although each theory is a valid representation of particular types of hidden work in Moscow, no one theory fully captures the diverse nature of the hidden economy in this city, and that only by combining all of them can a finer‐grained understanding of the multifarious character of the hidden economy in this city be achieved. How these theories can be synthesised in order to develop this fuller and more nuanced understanding of the hidden economy is then outlined.

This study reveals that all these theories are needed to more fully understand the hidden economy of Moscow. Whether this is similarly the case elsewhere now needs to be investigated.

The recognition of multifarious types of hidden work, each with different economic implications, reveals that different policy approaches are perhaps required towards various forms of hidden work.

The paper re‐theorises the hidden economy as a sphere composed of heterogeneous types of work.

This paper tries to identify the wage gap between informal and formal workers and tests for the two-tier structure of the informal labour market in Poland.

The author employs the propensity score matching (PSM) technique and use data from the Polish Labour Force Survey (LFS) for the period 2009–2017 to estimate the wage gap between informal and formal workers, both at the means and along the wage distribution. The author uses two definitions of informal employment: (1) employment without a written agreement and (2) employment while officially registered as unemployed at a labour office. In order to reduce the bias resulting from the non-random selection of individuals into informal employment, he uses a rich set of control variables representing several individual characteristics.

After controlling for observed heterogeneity, the author finds that on average informal workers earn less than formal workers, both in terms of monthly earnings and hourly wage. This result is not sensitive to the definition of informal employment used and is stable over the analysed time period (2009–2017). However, the wage penalty to informal employment is substantially higher for individuals at the bottom of the wage distribution, which supports the hypothesis of the two-tier structure of the informal labour market in Poland.

The main contribution of this study is that it identifies the two-tier structure of the informal labour market in Poland: informal workers in the first quartile of the wage distribution and those above the first quartile appear to be in two partially different segments of the labour market.

The purpose of this paper is to advance a new way of explaining and tackling the illegitimate wage practice where employers pay their employees an undeclared (envelope) wage in addition to their formal salary. Drawing upon institutional theory, it is here proposed that envelope wages result from the lack of alignment of a society’s formal institutions (i.e. the codified laws and regulations) with its informal institutions (i.e. the socially shared unwritten understandings which reflect citizens’ norms, values and beliefs).

To evaluate this, data are reported from a 2013 Eurobarometer survey involving 1,738 face-to-face interviews with formal employees in four Baltic countries, namely, Estonia, Latvia, Lithuania and Poland.

The finding is that the greater is the asymmetry between the formal and informal institutions (i.e. the level of disagreement of citizens with the codified laws and regulations of formal institutions), the higher is the propensity to pay envelope wages. This is the case at both the individual- and country levels.

To reduce the prevalence of envelope wages, the resultant argument is that the values of employers and employees need to be aligned with the formal institutions. This requires alterations not only in the informal institutions, using measures such as tax education, awareness raising campaigns and normative appeals, but also changes in formal institutions so as to improve trust in government by fostering greater procedural justice, procedural fairness and redistributive justice.

This is the first paper to apply institutional theory to explaining and tackling envelope wages in the Baltic Sea region.

In spite of millions of quasi-formal workers in the European Union (EU), there is still limited understanding of what motivates workers to participate in these detrimental employment schemes, and why certain groups of workers exhibit higher inclination towards it. This article takes a novel approach by putting prospective envelope wage earners in the centre of this analysis.

Data from the 2019 Special Eurobarometer on undeclared work are used, and two-level random intercept cumulative logit modelling is applied.

One in seven fully declared EU workers would have nothing against receiving one part of their wages off-the-books. Manual workers and individuals whose job assumes travelling are the most willing to accept such kind of remuneration, and the same applies to workers with low tax morale and those who perceive the risk of being detected and persecuted as very small. On the other hand, women, older individuals, married persons and employees from large enterprises express the smallest inclination towards envelope wages. The environment in which an individual operates also plays a non-negligible role as the quality of the pension system and the strength of social contract were also identified as significant determinants of workers' readiness to accept envelope wages.

This article fills in the gap in the literature by analysing what workers think about wage under-reporting and what factors drive their willingness to accept envelope wages.

Capital theory has taken a new turn with the theoretical discovery that wage curves tend to get linear in random systems, the larger they are, and with the confirmation that empirical wage curves do not deviate a great deal from linearity. The present chapter adds to these results by arguing that reswitching becomes less likely for larger systems, while Wicksell effects are almost surely present. But it can also be shown that the elasticity of substitution is likely to be small in random systems so that a policy to lower real wages will not easily generate much additional employment in a closed economy. A new perspective on employment policies is therefore called for.

We estimate a double-hurdle (DH) model of the Hungarian wage distribution assuming censoring at the minimum wage and wage under-reporting (i.e. compensation consisting of the minimum wage, subject to taxation and an unreported cash supplement). We estimate the probability of under-reporting for minimum wage earners, simulate their genuine earnings and classify them and their employers as ‘cheaters’ and ‘non-cheaters’. In the possession of the classification, we check how cheaters and non-cheaters reacted to the introduction of a minimum social security contribution base, equal to 200 per cent of the minimum wage, in 2007. The findings suggest that cheaters were more likely to raise the wages of their minimum wage earners to 200 per cent of the minimum wage, thereby reducing the risk of tax audit. Cheating firms also experienced faster average wage growth and slower output growth. The results suggest that the DH model is able to identify the loci of wage under-reporting with some precision.

To transcend the view of employment as either formal or informal, this paper evaluates the prevalence of quasi-formal employment where formal employers pay formal employees an unreported (“envelope”) wage in addition to their formal reported salary. To explain the individual-level variations in quasi-formal employment, the “marginalisation” thesis is evaluated that this practice is more prevalent among vulnerable groups and to explain the country-level variations, and a neo-institutionalist theory is evaluated that it is more prevalent where formal institutional failures lead to an asymmetry between the formal laws and regulations and the unwritten socially shared rules of informal institutions.

To evaluate the individual- and country-level variations in the prevalence of quasi-formal employment, a multi-level logistic regression is provided of data from special 2019 Eurobarometer survey 92.1 involving 11,793 interviews with employees across 28 European countries (the 27 member states of the European Union and the United Kingdom).

Of the 3.5% of employees (1 in 28) who receive under-reported salaries, the marginalisation thesis is supported that it is largely vulnerable population groups. So too is the neo-institutionalist explanation that quasi-formal employment is more common in countries where the non-alignment of formal and informal institutions is greater, with the formal institutional failings producing this identified as lower levels of economic development, less modernised state bureaucracies and lower levels of taxation and social protection.

The policy implication is that tackling quasi-formal employment requires not only enforcement authorities to improve the risk of detection of this illegal wage practice but also governments to change wider macro-level structural conditions. These are outlined.

Contemporary new evidence is provided of the prevalence of quasi-formal employment along with how this illegal wage practice can be explained and tackled.

The purpose of this paper is to advance a new explanation for cross-country variations in the participation of small businesses in the informal economy. Drawing upon institutional theory, it proposes that the greater the asymmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality), the greater is the propensity of small businesses to participate in the informal economy. To analyse this, the extent to which small businesses evade payroll taxes by paying employees an undeclared (envelope) wage in addition to their official declared salary is analysed.

To evaluate this, data are reported from a 2013 Eurobarometer survey involving 5,174 face-to-face interviews with employees in small businesses across the 28 member states of the European Union (EU-28).

The finding is that small businesses display a greater propensity to engage in this informal wage practice in countries where there is a higher degree of asymmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality). A multi-level logistic regression analysis reveals these to be countries which have lower qualities of governance, lower levels of taxation and intervention in the labour market and less effective social transfer systems.

The major limitation of this study is that it has only examined whether employees in small businesses receive informal wages. Future cross-country surveys should analyse a wider range of ways in which small businesses participate in the informal economy such as under-reporting turnover.

This is the first known analysis of cross-country variations in the participation of small businesses in the informal economy.