Measures to tackle the key drivers of wage underreporting in Latvia

Wage under-reporting (or under-declared employment) occurs when a formal employer pays a formal employee an official declared wage but also an additional undeclared (“envelope”) wage. Given that employers often give this undeclared part of the wage to the employee as cash in an envelope, the study of wage under-reporting is commonly referred to as the study of “envelope wage” practices. To tackle wage under-reporting, two contrasting policy approaches are available to governments and social partners. A “direct” controls approach ensures that the costs of engaging in wage under-reporting outweigh the benefits, either by increasing the penalties and risks of detection, or by improving the ease and benefits of full declaration. An “indirect” controls approach, meanwhile, asserts that wage under-reporting occurs when the norms, values and beliefs of employees and employers are not in symmetry with the laws and regulations. Here, therefore, policy measures seek to align the norms, values and beliefs of employees and employers with the laws and regulations. This is done either by changing norms, values and beliefs using education and awareness raising campaigns or by modernising formal institutions to improve trust in government. Here, the policy initiatives are identified for tackling each determinant of wage under-reporting by: (i) explaining why it is important to focus on the determinant and its potential impact on preventing envelope wages; (ii) reporting “best practices” in fighting this determinant of envelope wages in other countries and (iii) making preliminary suggestions what can be done in Latvia to address this issue in addition to initiatives already initiated.