The impact of measures to tackle undeclared work on the extent of informal work in Romania

Abstract

Accounting and tax regulations may encourage firms to shift from the formal to the informal economy, mainly to bypass these rules. Too high a tax burden is felt by firms through an increase in costs, as they are tempted to opt for unrecorded, unreported (undeclared work) or partially declared, under-reported (gray work or envelope work) activities. In this paper we aimed to analyze the extent of undeclared work by firms with at least one employee, assessing the interaction between this phenomenon and the impact of measures to combat undeclared work that were implemented by labor inspectors between 2012 and 2023. The paper integrates empirical data and theoretical models, exploring the nature of the undeclared work in Romania aiming to provide a clear picture of the evolution of this behavior and the effectiveness of policy and institutional interventions in Romania. The analysis shows that Romanian labor inspectors have stepped up controls and fines in key sectors, but the overall effectiveness of measures to identify and combat undeclared work should be correlated with the overall decrease in the incidence of undeclared work at national level. The main limitation of this research derives from the nature of data that we have used. The methods used in order to assess the undeclared work can be direct or indirect and the data must be carefully collected and interpreted taking into consideration the method which was used in order to obtain it.