Concept of work and that of workplace has significantly changed, particularly with development of technology. There are less and less jobs that are tied to the office and traditional ways of organizing work. Care for household members, children and elderly, as a form of unpaid and statistically invisible work is underestimated from the aspect of its influence and importance for human development.

A large share of informal work, which is one of the features of Montenegrin labour market, emphasizes the need to develop the institutional environment that will provide incentives to formalize work in the informal sector. Therefore, this Report analyses causes and consequences of informal economy with an emphasis on the informal work. The informal economy and informal work are observed through the lenses of human development, i.e. ensuring the opportunities for people to enjoy long, healthy and creative life.

The aim of the Report is to propose to the decision makers some effective policies of formalization of informal employment that would contribute to human development and promote dignified work, respecting the need not to restrict or demotivate economic activities.


Human development and the informal economy

Human development is the process of extending the range of choices. In principle, these choices can be endless and they change in time. But on all levels of development the three key choices for people are to have a long and healthy life, to acquire knowledge and have access to the resources needed for decent life standard. From the perspective of human development the relevant concept is work and not jobs or employment.

Since 2005 Montenegro has been continuously making progress in the components of the HD index, and in its overall value. In 2014 Montenegro was for the first time ranked among the countries with very high level of human development, which are the countries that in addition to certain level of income also have the framework that ensures their citizens to enjoy the benefits of economic growth and conditions for high quality, long and creative life.


Profile of the informal sector in Montenegro in 2014

According to the results of the research "Informal employment and grey economy in Montenegro" conducted by IPSOS in 2014, informal economy and informal work make a significant share of economic activities in Montenegro. Almost one quarter (24.5%) of economic activities takes place in the grey zone, while out of the total number of persons who work, 32.7% are either informally hired (22.3%) or have a part of their salary paid "cash in hand" (10.4%). In 2014 the budget of Montenegro had the revenue smaller by 140,6 million euro because of the evasion in paying the appropriate taxes and contributions for informally employed workers on an annual level. That was 9.4% of the total budget revenues.

In the structure of undeclared employed persons, 70% are the self-employed. The largest group of informally employed persons are of the age between 35 and 64 (59.9%), while the rate of informal employment is the highest among young people (34% for the age group 15-24) and the oldest (73% for persons of 65+). As for the education level, in the group of employed persons without primary school education, 70.9% are engaged in the informal sector.

Observed by activities, the largest volume of informal unemployment was recorded in agriculture and in the households that function as employers - 87.1% and 90.9% informally employed respectively out of the total number of persons employed in the sector. High share of informally employed persons in the total number of employed persons is recorded in the construction industry (36.3%) and services (34.9%), while the most significant volumes of tax evasion are recorded in the field of arts, recreation and entertainment (32.6%).

Women are less engaged in informal activities than men. Out of the total number of employed women, every fifth woman is engaged within informal sector, while every fourth men is informally employed.


The Informal Economy – Gender Aspect

According to demographic characteristics, women are less engaged in informal activities than men, which is the case in transition countries (Lehmann and Pignatti, 2007; Bernabè and Stampini, 2008), but not in developing countries (Perry et al., 2007). Lower rates of informal employment of women than men in Montenegro are in line with the findings of Angel-Urdinola and Tanabe (2012), which show that higher informal activity of women can be found in countries where the proportion of people employed in agriculture out of total employment is significant, since women dominate as unpaid household members who help the other members. In Montenegro, the level of people employed in agriculture out of the overall employment is relatively low (6.2%).

“In job interviews they ask you how old you are, if you have children and how old they are."

– An informally employed woman who is paid her entire salary "cash-in-hand".

To assess the net impact of factors like education, location, activity, etc. on the decision of individuals to be informally employed, we used regression analysis. We analysed the factors that influence informal employment and identification of which could be of use in defining policies aimed at reducing informal employment. That analysis showed that gender is not a significant determinant of informal employment if we assume that the other characteristics of the individual are the same. Descriptive analysis yielded different results. Other insignificant variables include whether the person receives social benefits and the marital status of the person, although more recent research shows that good and stable employment is an important precondition for young people, particularly men, entering into marriage (Angel-Urdinola and Tanabe 2012).

“I was asked if I was married, if I had any children, and some went so far as to ask me if I had a boyfriend. Because, if you have a serious relationship that might mean you will marry soon and have children.”

An informally employed woman who is paid a part of her salary "cash-in-hand".

The survey has shown that women are less engaged in informal activities than men. Also, the activity rate of women is lower than the activity rate of men, and the same goes for the unemployment rate. Of the total number of employed women, one in five is engaged within the informal sector, while for men, one in four is informally employed. Close to 70% of women are formally employed while about 65% of men are formally employed.


The informal economy and poverty, inequalities and exclusion

Empirical research have shown that informal economy, i.e. household income from undeclared work, constitutes a significant source of household incomes and that it affects reduction of the poverty risks. However, working in informal economy usually means poorer quality of job both in terms of incomes and in terms of working conditions. Working in the informal sector impacts using of the social protection services, particularly pension and health insurance.

Differences in the poverty risk are particularly emphasized among informally self-employed people where 27.2% of them are exposed to the risk of poverty.

Undeclared work is a form of work that does not ensure fundamental rights guaranteed by labour legislation, like notice period, severance payment, possibility to obtain compensation of unpaid salaries, right to collective bargaining, minimum wage, working hours, vacation and other rights guaranteed in labour legislation.

The poverty risk rate is significantly higher for informally employed persons than formally employed persons (17.1% in comparison to 5.9%). The differences in the poverty risk are particularly emphasized among informally self-employed persons where 27.2% of them are exposed to the poverty risk. As for the salaries, the mean incomes of the informally employed persons are on average by 28.7% lower than the incomes of formally employed individuals.


The causes and consequences of the informal economy

Representatives of the business sector say that the key challenges and obstacles to formality include: numerous and high para-fiscal levies, poor results of operations, high taxes and contributions, high severance pays that have to be paid to the employees in case of dismissal, long terms that the state has for VAT refund, possibility for the employed persons to use social support and other benefits intended for unemployed persons (64% of employers) short period that law allowed for fixed term employment - 2 years, etc.

Increase of HDI level in Montenegro has led to a decrease of informal employment

These data suggest that every increase in the tax burden has a negative impact on the employment in the formal sector. Increase in the tax burden that burdens the labour leads to the increases of the labour costs, for both, the new and the existing employees, which in the end can only have a negative impact on the reduction of the number of jobs in the formal sector and on generating new jobs. In addition to the tax burden, the regulation in the labour market is one of the factors that are decisive for informal engagement of employed persons.

Higher level of human development led in Montenegro to lower informal employment. This correlation is to the largest extent a result of the improvements in the education system, higher enrolment rates and completion of schooling as well as improvements of the overall health of the population.


Productivity and access to capital/development

Transition from informal to formal economy is the key for inclusive development and decent work for all. If the rules are equal for all, formalization brings benefits both for the companies that function in the informal sector and for the individuals that are engaged in the informal sector.

The key benefits of formalization for the employed persons include elimination of deprivation in terms of insurance and vacation, as well as ensuring decent working conditions. For undeclared self-employed persons formalization would mean a loss of one part of their incomes, but it would also mean access to the services provided by the public sector and participation in the programmes provided by the state to encourage entrepreneurship, access to the bank loans etc, as well as better opportunities to develop their businesses. Benefits of the formalization for the companies include access to financing, using the incentives offered by the state, implementation of contracts and avoiding penalties.


The 2030 agenda for promotion of productive employment and decent work

Concept of the Millennium Development Goals helped to strengthen the efforts on the national and global level invested into defining and implementing policies aimed at improving the quality of life of all individuals, with a particular emphasis on the reduction of extreme poverty, access to health services and improvement of health of the population, reduction in gender differences and preservation of the environment.

2030 Agenda ensures support to meeting of various national and regional socio-economic needs because the defined goals include topics that are recognized as crucial for the future development of Montenegro, like full employment, social inclusion of vulnerable groups, decent work, rule of law, green economy, high quality education, gender equality, etc.

One of the Sustainable Development Goals is to ensure decent work, where work is defined as the basis of wellbeing of every individual. The concept of decent work and full and productive employment with the promotion of continuous, inclusive and sustainable economic growth is particularly underlined within the Goal 8 of the 2030 Agenda. This goal is also reflected in the strategic goals that refer to the incentives for employability and social inclusion, raising the level of competitiveness of Montenegrin development aimed at achieving sustainable development and green jobs, as well as to overcoming the lack of managers and strengthening of corporate social responsibility.


Institutions and trust building

The scale of informal economy and undeclared work also depends on the efficiency of institutions, as well as on how sure the citizens are of their equal treatment in the application of laws. Strengthening of the efficiency of institutions and strengthening of the trust in the institutions in practice implies reduction in differences between formal and informal institutions. Population will not improve tax morale if the trust in the institutions is low and if the belief in the existence of corruption in the public sector is widespread.

“I would accept to work even for €100, just to have a permanent job and social security. Social security first, because my children will grow up and leave, and I will remain alone without anything. I did not have social security in my first job either. At first I thought – I wish I could find a job to get a salary of €400 to €500, the security is not so important. But as the years go by and my children grow up, you start thinking – who will support you if you have no pension? If you had €100 at least it would be different. Neither my husband nor I have registered employment – how shall we live in the future? It is not important how much it is, it just makes you feel more secure."

An informally employed woman who is a beneficiary of material allowance for families.

Over 80% of the respondents in Montenegro think that tax evasion is unacceptable behaviour. However, if informed that there is informal work, or if hired in informal manner, more than half of the working population of Montenegro would not report it to the inspection. Employers who have undeclared employees, think that not declaring employees is a common practice and that all employers have undeclared employees.


Policy challenges - transition from informal to formal employment

Measures and activities implemented in recent past to combat informal employment have not had any significant impact on this phenomenon. From the aspect of human development, the most desirable option is to generate new jobs and to make them as high quality as possible. High quality jobs require conducive, competitive, stable and predictable institutional system and time. If we waited only for the high quality new jobs and if we insisted on formalization through repression, it would lead only to inactivity of a large number of informally employed persons. That would not contribute either to the reduction of poverty, or to increase in the budget revenues, or to the human development.

Therefore the formalization policy has to be focused on the long term measures that are related to: (i) improvement of the business environment and improvement of the quality of services of the public sector, to generate new and higher quality jobs; (ii) the change of the "wrong" incentives in the system, so that those that work informally can feel the benefits of formalization; (iii) more efficient work of inspection bodies; and (iv) the promotion of equal rules for all to strengthen trust.


Conclusions and recommendations

Analysis of the scope and features of informal economy, as well as the reasons and motives for informal work in Montenegro, lead to the definition of several (general and specific) recommendations the implementation of which would lead to formalization of work, and to overcoming of exclusion and marginalization. The recommendations refer to the following reform and improvements:

  • Education system should be inclusive, high quality and efficient.
  • Health care should be more accessible, of higher quality and more efficient.
  • Changes are also required in the field of incentives for the formalization within the social care system.
  • Regulatory framework should be encouraging for formalization.
  • Labour legislation should be more flexible.
  • Public sector must be more efficient and more "fair".
  • Tax policy should be in the function of creating preconditions for generating new jobs and for gradual formalization.
  • Work of inspection bodies and enforcement of penalties should be improved.
  • Instead of putting the focus on deterrence, it should be put on education and development of a culture of trust.


Previous reports Global HDR UNDP Montenegro

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