Berlin Undeclared work and other forms of the informal economy are likely to increase significantly in Germany this year. This is the result of calculations by the Linz finance scientist Friedrich Schneider, which are available to the Handelsblatt.
Schneider expects the shadow economy to increase by 22.1 billion euros to 360.31 billion euros compared to the previous year. This corresponds to 10.1 percent of gross domestic product (GDP).
At the beginning of the year, Schneider had originally calculated that undeclared work would fall to 326 billion euros this year. “But the energy crisis and high inflation rates have reversed this result,” says the economist. If employees can no longer get by on their regular earnings, the incentive to do undeclared work increases. In a current survey of the workforce by the union-related research institute WSI, 27 percent of those surveyed rated their current financial situation as severe or extremely stressful.
In addition to undeclared work, Schneider also counts prostitution, drug dealing and receiving stolen goods as part of the informal economy. Using various data, he determines the proportion of undeclared work in Germany’s economic output.
Schneider’s numbers also match a response from the Federal Ministry of Finance to a request from SPD MP Bernhard Daldrup. Accordingly, in the first half of the year, the Financial Control Office (FKS) initiated 9,251 preliminary investigations in the construction industry alone – around a fifth more than in the same period last year.
Why undeclared work not only has disadvantages
It is also clear to the Green labor market expert Beate Müller-Gemmeke: People felt the price increases as a result of the Russian war of aggression against Ukraine. She told the Handelsblatt: “But that doesn’t justify undeclared work.” Because this harms the state through evaded taxes – even though the citizens would be relieved of up to 300 billion euros.
However, economist Schneider warns against taking too hard action against undeclared work in times of crisis. Because it is an important form of additional economic value creation. “The sharp increase in undeclared work this year also protected many people from sliding into poverty, since almost all of them had considerable income losses due to high inflation and the sharp rise in energy costs,” says Schneider.
More than 80 percent would also immediately spend the money they had secretly earned. This also stabilized the economy and compensated for some of the tax losses through additional VAT revenue. “Of course, activities in the shadow economy are not legal and should be combated with incentive-oriented measures,” says Schneider. But penalties only have a very limited effect and are often not enforceable.
The federal government, on the other hand, has intensified the fight against undeclared work in recent years. Undeclared work and illegal employment would result in “serious loss of contributions to social security and loss of tax revenue,” according to the latest government report on the subject. They also reduced the property rights and social benefit claims of those affected and impaired market competition.
Customs investigators therefore repeatedly target particularly vulnerable sectors with special checks. In Hesse, for example, a special commission struck a heavy blow against an illegal worker ring in the middle of the year: In a large-scale search, more than 500 emergency services took action against organized undeclared work in the construction industry. The perpetrators are said to have carried out construction contracts worth millions illegally for years.
The problem is far greater for the Bauen-Agrar-Umwelt (IG Bau) industrial union. “Undeclared work and illegal employment are part of everyday life in construction,” says board member Carsten Burckhardt. “More and more often we are dealing with structures of organized crime.” According to figures from the Federal Ministry of Finance, eleven percent of the almost 83,000 proceedings across all sectors were in the construction sector. The amount of damage determined there was 161 million euros.
Read more about undeclared work, illegal employment and organized crime
IG-Bau board member Burckhardt warns of a further increase in illegal machinations: “High inflation, rising construction interest rates, high material and energy costs – everything leads to growing cost pressure in construction.” Dubious companies would therefore now even more try to reduce their costs through wage dumping and the evasion of taxes and social security contributions.
Anyone in the construction industry who suspects undeclared work can contact the trade association for construction (BG Bau) using an online form or by e-mail. In 2020 this happened in 1700 cases, a year later it was 2300. Around 90 percent of the reports are forwarded to authorities such as customs.
What politics is doing against undeclared work
Politicians claim to have done a lot to combat undeclared work and the informal economy. According to the latest government report, which is published every four years, the many measures taken illustrate “the continued great importance of combating undeclared work and illegal employment for the Federal Government”.
For example, since November 2019, with the so-called Parcel Courier Protection Act, general contractor liability no longer only applies to construction and meat processing, but also to the parcel industry. An entrepreneur who commissions subcontractors with the delivery is liable if they do not pay the social security contributions properly. The federal government justified the law with the fact that, according to the findings of the customs administration, criminal structures had formed in the often long chains of subcontractors.
In addition, in 2019 the government tightened the law to combat undeclared work. In addition to an increase in the FKS, which is intended to uncover undeclared work and controls the stands at Christmas markets these days, the law gives the investigators additional powers. They can also check the so-called “workers’ strip” even before the day laborers are employed on a construction site or elsewhere.
In 2021, the financial control for undeclared work checked more than 48,000 employers and initiated more than 120,000 criminal proceedings. In addition, tax and social security losses of almost 790 million euros were determined and illegally generated assets of 66.8 million euros were skimmed off. But despite all efforts, the state only uncovers a small proportion of undeclared work.
Critics attribute this to a still insufficient control density. In a Bundestag motion, the Left Party complained that the number of employers checked by the FKS had increased slightly again in 2021, but was still below the level of the pre-Corona year 2019.
Greens labor market expert Beate Müller-Gemmeke also demands that the FKS must control effectively: because undeclared work is primarily at the expense of honest companies. “And that’s a real problem for them in economically difficult times.”
Critics complain that customs controls are too low.
(Photo: imago/photothek)
Public finance scientist Schneider has been dealing with the informal economy since 1997. According to his calculations, the shadow economy reached a peak in 2003. 370 billion euros in illegal employment flowed past the tax authorities, which corresponded to a share of 16.7 percent of gross domestic product at the time.
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Since then, undeclared work in Germany has tended to decline. It reached its lowest point in 2019 with a share of 9.3 percent. According to researchers’ estimates, the volume of undeclared work in Germany last year was 338 billion euros. The share of GDP was 9.5 percent. The main reasons for the decline were the good labor market situation and rising wages. Without the crisis, the proportion of undeclared work in the economy would have fallen to less than nine percent.
In his calculation model, Schneider includes, among other things, the tax burden, the social security contributions paid, the disposable income, the official employment rate and the actual working hours. The researcher emphasizes that his figures are an estimate.
Since the shadow economy takes place in secret, its extent can naturally only be estimated. However, indications can be found directly, for example through surveys or investigations into tax evasion, or indirectly, for example if there is a discrepancy in household income and expenditure or if there are a particularly large number of large banknotes in circulation.
On the occasion of the major cases of corruption in Austria and the EU Parliament, Schneider determined not only the damage caused by undeclared work but also the damage caused by corruption to the German economy. According to preliminary calculations, the economic damage in the previous year was 234.1 billion euros. In 2020, the damage had amounted to 221.2 billion euros.
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