Employer-Employee Collusion and Payments Under the Table

Study Context

The literature on informality has mainly focused on two types of informal employment: an “extensive” margin and an “intensive” margin. The traditional “extensive margin” defines informal workers as those who work in businesses that are not registered with the tax authorities and do not comply with labor market regulations (e.g. Rauch (1991), Bosch and Esteban-Pretel (2012)). The “intensive margin” additionally considers as informal workers those that are not registered with the tax authorities even though they work at a registered establishment (e.g. Ulyssea (2018)). These margins are often condensed in a definition of informal workers as those who do not contribute to social security (Bonet et al (2019)).  Underlying this definition, there is an assumption that formal workers employed in formal firms do not have any informal ties to their employer.

Javier and team go beyond this traditional framework to look at a different margin of informality: registered firms can hire workers formally (on the books) but pay part of the salary with payments “under the table” (not subject to taxes). The team argues that understanding this phenomenon is crucial. It has important revenue, distributional, and regulatory implications. Moreover, it challenges the reliability of administrative data in developing countries for research and policy guidance.

Javier, Roberto and Maximiliano have conducted the first large survey on the topic in Brazil, documenting novel findings:

• >26% of formal employees admit to receiving payments under the table
• >20% of salary is paid this way. Payments under the table are less prevalent in large firms (but still sizeable)
• They are typically suggested by the employer at the beginning of the labor relationship
• Moreover, we find that those who receive payments under the table are slightly richer than non-receivers and the proportion of non-reported wage increases as wage increases

Study Design

The team will use Development Economics Challenge funds to expand their understanding of  how the provision of information on the benefits of reported wages may affect people’s willingness to renegotiate their wages. They will link survey respondents to administrative data through an agreement with the Brazilian Tax Agency. 

Subsequently, they will design a new survey focused only on information provision with 3,000 study participants. They will compare how information treatment can affect intentions to renegotiate and how likely it is that renegotiation actually takes place. Finally, they also collect and analyze information on all labor lawsuits related to PUT to shed light on the limitation to this type of informality.

Results and Policy Lessons

Preliminary results suggest that about a quarter of formal employees in Brazil receive “Payments Under the Table.” The proportion of these types of payments as a percentage of income is increasing, and the government’s tax base may be more affected by PUT to formal employees than it is by informality.

Additionally, it becomes harder for employers and employees to collude in this manner when benefits are linked to reported wages and in an environment where firms are susceptible to labor lawsuits.

The work has many potential policy implications, chief amongst them a potential to shift the attention of tax authorities to auditing for PUT vs. a direct focus on informality.

Javier’s work attracted the attention of additional tax agencies in Latin America and he has since expanded the collection of evidence to Argentina, Colombia, Chile, and Mexico.