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Half of Russians are employed in shadow economy

April 04, 2013, 15:33 UTC+3 Alexandrova Lyudmila

Nearly half of the able-bodied population of Russia is employed in the shadow sector of the economy beyond the authorities’ control and the national labor market today in fact remains illegitimate, Deputy Prime Minister Olga Golodets said on Wednesday. The acknowledgement sounded quite shocking. It is these 38 million people employed in the shadow sector who, Golodets said, are grossly responsible for the shortage of public spending. Experts believe that a large share of the responsibility for this sort of situation should be placed on the government.

“Regrettably, our market of labor remains practically illegal,” Golodets, the deputy prime minister responsible for the package of social issues in the Cabinet, told an international conference on economic and social development. She said Russia’s able-bodied population currently numbered 86 million. “The sectors that we can see and that are clear to us employ a total of 48 million. It is anyone’s guess where the others are employed, what are they busy with, and how,” Golodets said.

A large share of the labor force that is unaccounted for about 38 million people has adverse effects on the labor market, on the economy and on the social sphere of the country in general. Golodets believes that the employees of the shadow sector pose a great problem to the whole of society, because their existence causes “under- financing of all social spending.” Golodets also came out against lowering the insurance tax on the self-employed business people.

“One should be aware that if they underpay taxes, this burden is placed on the whole of society. Coalminers, for instance, have to fund pensions not only of their own parents, but also of those who do not pay anything at all,” Golodets said.

In her opinion, the Pension Fund’s lasting problems are due to the fact that nearly half of the able-bodied population does not pay taxes. The market of labor beyond the authorities’ control creates imbalances in the other spheres of economic activity. For instance, in 2012 the number of vacancies in Russia reached 1.5 million against 1.1 million in 2011. But there are literally no applicants who might fill them, because millions of employees and thousands of their employers have no incentives to being legalized.

The economists’ views of the problem vary, but a majority believes that the non-transparent market of labor is capable of generating a variety of risks - social, economic and political. However, many have been warning against over-dramatizing the situation.

“Golodets has identified as ‘transparent’ those employed at major and medium enterprises, which have strict monthly wage accounting. She does that for a good reason. Tax payments on these wage funds are very strict,” the daily Komsomolskaya Pravda quotes Natalya Zubarevich, the director of the regional program of the Independent Institute of Social Policy as saying. “But there are also small businesses, which operate quite legally, but there is no comprehensible information about them or about how much money they really make. Lastly, there are 15-20 million people who are utterly obscure to the fiscal authorities or labor market specialists. What they do to earn a living is an enigma. Selling berries and mushrooms picked up in the woods is a sort of employment, too.”

“That’s a transitional economy, and in its context things like that are quite normal,” Zubarevich said.

An expert at the Center of Macroeconomic Analysis and Short-Term Forecasting, Igor Polyakov, too, believes that the scale of this phenomenon is not as disastrous as the prime minister has been trying to present. He said far from all of the 38 million are in the shadow sector of the economy.

“Far from all of these people are beyond the legal framework,” Novyie Izvestia quotes Polyakov as saying. “A considerable part of the able-bodied population is reluctant to be engaged in economic activity. They keep their households and live on the incomes the family gets. The chances of tapping this potential are very slim. They are jobless. According to official statistics, there are 4.3 million of them.”

The chief of the Social Analysis Center of the Institute of Globalization and Social Movements, Anna Ochkina, is certain that the situation is far worse than it may look to the authorities. “In the shadow sector one finds those who are employed quite officially, but also do odd jobs on the side,” she said. “Here’s a very simple example. Take a teacher, who offers his services to students at home in his spare time for cash. This is precisely what one calls shadow economy. The term applies to any services that are not taxed. Here belong people who work their gardens. In the Volga River area up to 40 percent of food is grown in private households.”

The general director of the company CASE, Tatyana Baskina, is quoted by the daily Nezavisimaya Gazeta as saying the entire market of housekeeping personnel, a large share of the market of building services and private household repairs remains untaxed.

Baskina said the government’s measures against the illegal market of labor were conflicting and inconsistent.

“It is a complex problem and for addressing it properly it is not enough to just make amendments to the legislation, step up the activity of tax authorities and exert administrative pressures,” says the general director of City Express, Alexei Kichatov. “To form a civilized market of labor the economic policies must be reformed fundamentally. Take small businesses, where the tax system seems to be especially designed to be not transparent. The employer finds it not beneficial to pay legal wages not only to the hired employees, but also to oneself.”

“The state bears a great deal of the blame for that,” the director of the Institute of Social Policy and Socio-Economic Programs of the Higher School of Economics, Sergei Smirnov, told the daily Moskovsky Komsomolets. “They keep changing the rules of the game now and then. Why do we have this shadow sector? The employees do not believe that when they reach the retirement age, they will have a decent pension to live on. The current state of affairs as it is, a job is payable far better if the income is kept secret.”