Alga aploksnē

From Global Informality Project
Revision as of 18:51, 13 August 2016 by Admin (talk | contribs)
(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)
Jump to: navigation, search
Alga aploksnē
Informal practice commonly found in Latvia
Latvia map.png
Map of Latvia, where Alga aploksnē commonly takes place.
Latvia flag.png
Flag of Latvia.
Entry written by Klāvs Sedlenieks.
Klāvs Sedlenieks is affiliated to Riga Stradins University.

Original Text: Klāvs Sedlenieks, Riga Stradins University

The Latvian terms alga aploksnē (‘salary in an envelope’) and aplokšņu alga (‘envelope wage’) refer to an undeclared part of a regular wage, concealed to allow the employer to evade a proportion of compulsory labour and social security taxes. The term derives from the widespread practice of handing over such salaries in envelopes, rather than by bank transfer or in an open, over-the-counter manner. This practice can be seen as part of a wider family of practices whereby the income of an employee or contractor is completely or partly concealed from the authorities (for instance moonlighting, tips in service industries or outright illegal employment – see Fudge, McCrystal and Sankaran 2012 [1] for a detailed description of varied informal work practices).

Aploksnu alga Wage in Envelope Cartoon.jpg

Alga aploksnē refers mostly to the regular but officially unrecorded payments of salary that is paid alongside official payments. Part of the salary is indicated in the employment contract, signed for and officially reported. The other part of the salary does not feature in official books, is paid unofficially, and concealed from tax authorities. The ratio of the officially declared wage versus the alga aploksnē is estimated to be 50 per cent in Latvia [2]. The official part of the salary is often levelled down to the minimum wage that is required by law (360 EUR per month in 2015). The money is paid by the official employer, thus making it different from various tipping arrangements (e.g. in bars or hotels, see O’Connor 1971[3]) and illegal private entrepreneurship where the money is paid directly by the customer and on an irregular basis (e.g. ‘cash-in-hand’ in the UK and various other countries).

Both the employer and employees often perceive alga aploksnē as mutually beneficial. The employer has the opportunity to attract workforce at less expense, while employees receive more cash immediately and directly, rather than through benefits redistributed by the State. The difference between the formally and informally paid salary is normally discussed in job negotiations, so it is clear what will be received ‘on paper’ and what ‘in hand’ (uz rokas).

Using the system of alga aploksnē does also incur drawbacks for both employer and employee. In addition to the legal consequences, the employer needs to maintain a constant supply of ready cash that is not accounted for in the official books. This requires careful manipulation of the electronic cash register and/or dealing with criminals who provide services of small-scale money laundering for a fee. For the employee alga aploksnē means significantly reduced social benefits, such as job security and pensions.

A survey by Putniņš and Sauka concludes that in the period 2009-2014 the percentage of underreported salaries in the Baltic states fluctuated from 35.5 (in Latvia, 2010) to as low as 12.2 (in Lithuania, 2014). In Latvia and Lithuania the underreported part amounts to 11-30 per cent of the total salary while in Estonia the most frequently used proportion falls within the interval of 1-10 per cent. Only just over 10 per cent of the surveyed company representatives in Estonia and Latvia and 24 per cent in Lithuania declare that they pay all social taxes as required by law [4]

The alga aploksnē payments in Latvia are so omnipresent and socially acceptable that credit institutions are reported to have accepted declarations of informal income as proof of the creditworthiness of clients. Allegedly such banking practices were widespread before the economic crisis of 2008 and credits issued on the basis of such information contributed to the economic meltdown. Banks supposedly learned their lesson and stopped the practice, but one case was reported as late as 2015[5], though the bank officially denied the practice. The practice of alga aploksnē is only a semi-open secret when it comes to identifying concrete employers who use it. As a social practice, though, it is widely acknowledged by the public, representatives of government and non-governmental organisations, in particular when tax policies are discussed.

Practices similar to alga aploksnē can be observed elsewhere in the world. ‘Envelope wages’ are well-researched in the European Union [6][7][8][9][10] . A 2007 Eurobarometer survey indicates that envelope wages can be found throughout the European Union; however, the practice is most widespread in countries of Central and Eastern Europe and least widespread in Scandinavia. While in Central and Eastern Europe 10 per cent of employees have received a wage in an envelope, it is only 4 per cent in Southern Europe and 2 per cent in Western Europe and Nordic countries [11]About 50 per cent of all envelope wage payments in the EU happen in five countries: Bulgaria, Latvia, Lithuania Poland, Romania [12]. Moreover it is possible that Western European and Nordic respondents by envelope wages understood income that they earned for doing an irregular, part-time job (in contrast to East Europeans for whom it is a part of a regular job arrangement).

All neighbouring countries of Latvia have terms and practices that are virtually identical to Latvian alga aploksnē: Estonia (ümbrikupalgad), Lithuania (alga vokeliose), Russia (зарплата в конверте), Belarus (зарплата ў канверце). Similar terms also exist in Ukraine (зарплата в конверті); Moldova and Romania (salariu într-un plic); and Bulgaria (пари в плик). All of these terms literally mean ‘salary in an envelope’, and refer specifically to the arrangement of concealing a given part of the regular salary (as opposed to undeclared earnings in general). Other societies may have similar practice but lack a particular term (see for instance the entry Rad na crno in Serbia in this edition). However, it seems that neither the term nor the practice goes beyond the area of post-socialist countries in Central and Eastern Europe (CEE) and Russia.

Alga aploksnē is a phenomenon that only developed after dismantling of the Soviet economic system. During the Soviet period either all salary was paid according to the books or the employment was off the record altogether (hence the term ‘second economy’, see e.g. Grossman 1992). Thus alga aploksnē has no direct precedent in the Soviet heritage. Woolfson, speaking of salaries in an envelope argues that the ‘informalization in the post-communist transition period […] derives less from the legacy of Soviet times than from the predatory nature of the neo-liberal capitalism’[13]. Fudge (2012)[14] similarly argues that the recent proliferation of informal work practices in all kinds of societies is due to globalisation and deregulation stemming from neo-liberal policies. Contesting the view which traces the roots of informality to features of Soviet citizenship, Sedlenieks (2013)[15] and Mühlfried (2014)[16] argue that the tendency of citizens to treat rules lightly and avoid regulations is not a result of Soviet heritage but an adaptation of citizens to the instability of state policies over a much longer period. The aforementioned Eurobarometer survey indicates that in Western Europe and Nordic countries envelope wages are paid almost exclusively for jobs performed outside one’s regular employment, similar to what used to be the case in Central and East European countries during the socialist period, while currently alga aploksnē and similar practices in CEE are part of the regular employment.

According to quantitative comparative research, the spread of envelope wages negatively correlates with the level of regulation. Testing the hypothesis of correlation with over-regulation/under-regulation, Colin Williams finds that the practice is least widespread in countries with strong welfare systems and effective re-distribution of wealth, whereas in countries that have a more neo-liberal orientation with less state intervention in the labour market and weaker redistribution envelope wages are more prevalent [17].The qualitative evidence suggests that motivation to participate in the system of alga aploksnē is linked (apart from monetary gains) to the lack of trust in state social security system and the perception that tax money is often wasted by corrupt officials and politicians[18]. Accordingly, alga aploksnē and related practices become rationalised and reproduced at the expense of paying taxes to an unreliable state.

Notes

  1. Fudge, J., McCrystal, S. and Sankaran, K. 2012. Challenging the Legal Boundaries of Work Regulation. Oxford: Hart.
  2. Williams, C.C. 2013. 'Explaining employers' illicit envelope wage payments in the EU-27: a product of over-regulation or under-regulation?', Business Ethics: A European Review, 22(3): 325-340. p.331.
  3. O'Connor, C. M. 1971. 'Wages and tips in restaurants and hotels', Monthly Labor Review, 94(7): 47-51
  4. Putniņš, T. J, and Sauka, A. 2015. Shadow Economy Index for the Baltic Countries 2009-2014. Riga: The Centre for Sustainable Business at SSE Riga. p.16.
  5. LETA. 2015. Citadele' kredītu izsniegšanā ņem vērā arī ienākumus no 'aplokšņu algām. Financenet.lv, July 13, http://financenet.tvnet.lv/zinas/567709-citadele_kreditu_izsniegsana_nem_vera_ari_ienakumus_no_aploksnu_algam
  6. Williams, C. C. 2008. 'Envelope wages in Central and Eastern Europe and the EU', Post-Communist Economies, 20 (3): 363-376
  7. Williams, C. C. 2009a. 'Evaluating the Extent and Nature of “Envelope Wages” in the European Union: A Geographical Analysis', European Spatial Research and Policy, 16(1): 115- 129
  8. Williams, C. C. 2009b. 'The prevalence of envelope wages in the Baltic Sea region', Baltic Journal of Management, 4(3): 288-300
  9. Williams, C.C. 2013. 'Explaining employers' illicit envelope wage payments in the EU-27: a product of over-regulation or under-regulation?', Business Ethics: A European Review, 22(3): 325-340
  10. Woolfson, C. 2007. 'Pushing the envelope: the `informalization' of labour in post-communist new EU member states', Work, Employment & Society, 21(3): 551-564
  11. Williams, C.C. 2013. 'Explaining employers' illicit envelope wage payments in the EU-27: a product of over-regulation or under-regulation?', Business Ethics: A European Review, 22(3): 325-340. p.330
  12. Williams, C.C. 2013. 'Explaining employers' illicit envelope wage payments in the EU-27: a product of over-regulation or under-regulation?', Business Ethics: A European Review, 22(3): 325-340. p.330
  13. Woolfson, C. 2007. 'Pushing the envelope: the `informalization' of labour in post-communist new EU member states', Work, Employment & Society, 21(3): 551-564. p.552.
  14. Fudge, J. 2012. 'Blurring Legal Boundaries: Regulating for Decent Work, in Sankaran, K., McCrystal, S. amd Fudge, J. (eds), Challenging the Legal Boundaries of Work Regulation. Oxford: Hart: 1-26
  15. Sedlenieks, K. 2003. 'Cash in an Envelope: Corruption and Tax Avoidance as an Economic Strategy in Contemporary Riga', in Arnstberg, K. and Boren, T. (eds), Everyday Economy in Russia, Poland and Latvia. Sodertorn: Sodertorns hogskola: 25-69
  16. Mühlfried, F. 2014. Being a State and States of Being in Highland Georgia. Oxford, New York: Berghahn Books
  17. 2013. 'Explaining employers' illicit envelope wage payments in the EU-27: a product of over-regulation or under-regulation?', Business Ethics: A European Review, 22(3): 325-340. p.325
  18. Sedlenieks, K. 2003. 'Cash in an Envelope: Corruption and Tax Avoidance as an Economic Strategy in Contemporary Riga', in Arnstberg, K. and Boren, T. (eds), Everyday Economy in Russia, Poland and Latvia. Sodertorn: Sodertorns hogskola: 25-69. p.45.