Evaluating public sector management approaches

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Evaluating public sector management approaches towards undeclared work in the European Union

Undeclared work in the European Union 285

Colin C. Williams School of Management, University of Sheffield, Sheffield, UK Abstract Purpose – This paper seeks to analyse the various approaches being used by the public sector across the European Union to tackle undeclared work and to evaluate the direction of change. Design/methodology/approach – To do this, the National Action Plans for Employment 2001 and 2003 (NAPs) and the National Reform Programmes 2005-2008 (NRPs) are analysed, along with the data collected in international reviews conducted by the European Employment Observatory in Autumn 2004 and the European Industrial Relations Observatory (EIRO) in 2005 on undeclared work. Findings – In parallel with public sector management in other realms, where it is accepted that positive reinforcement of “good” behaviour is more effective at eliciting change than negative reinforcement of “bad” behaviour, the finding is that the public sector in EU member states is moving away from solely a repressive approach that seeks to detect and penalise offenders and towards an approach that also seeks to stimulate good behaviour by rewarding compliance. Until now, however, these positive reinforcement measures appear to remain firmly entrenched in a bureaucratic management approach that uses externally imposed direct control systems to generate reactive behaviours, rather than an internalised post-bureaucratic approach that seeks to generate constructive pro-activity and commitment to tax morality on the part of populations. Originality/value – This is one of the first attempts to evaluate how public sector management is tackling undeclared work in European member states. Keywords Taxation, Public policy, European Union, Financial controls, Problem employees Paper type Research paper

Introduction Tackling undeclared work is moving ever closer to the top of public policy agendas (European Commission, 1998, 2002, 2003a, b, c; Grabiner, 2000; ILO, 2002; OECD, 2000). Although traditionally viewed as mainly an issue for third (“majority”) world governments, the past decade or so has seen the issue of tackling undeclared work move further up the public sector agenda both in post-socialist societies, where it is sometimes cited by governments as their top public policy priority (e.g. Mission of Ukraine to European Communities, 2005), as well as in advanced economies. Indeed, at the 2003 Lisbon Summit of the European Council, tackling undeclared work was named by the European Union (EU) as one of its top ten priorities for action with regard to employment reform (European Commission, 2003a, b, c). Until now, however, and despite the priority being accorded to tackling undeclared work, few if any attempts have been made to critically review how public sector management approaches are seeking to deal with this issue, particularly in the EU where undeclared work has been estimated to constitute some 7-16 per cent of GDP in

International Journal of Public Sector Management Vol. 21 No. 3, 2008 pp. 285-294 q Emerald Group Publishing Limited 0951-3558 DOI 10.1108/09513550810863187

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Western Europe (European Commission, 1998) and 25-30 per cent of GDP in the EU member states of Eastern and Central Europe (Schneider and Enste, 2002). The aim of this paper is to begin to fill this gap. In order to do this, the first section will briefly outline a typology of the various public sector management approaches for tackling undeclared work, ranging from those that are more repressive in orientation and grounded in deterrence measures through to those that are more enabling in orientation and seek to stimulate formalisation. The second section then provides an evaluation of the approaches being adopted by EU member states along with the direction of change so as to understand the approaches being pursued. Akin to other policy spheres where there is widespread acceptance that the positive reinforcement of “good” behaviour is more effective at eliciting change than the negative reinforcement of “bad” behaviour, this will reveal that public sector management approaches are belatedly moving in the same direction so far as tackling undeclared work is concerned. The concluding section of the paper then discusses whether this can be also seen as marking a shift in this sphere of public sector management away from using externally imposed bureaucratic control systems to generate reactive behaviours, and towards a more internalised post-bureaucratic approach that seeks to generate constructive pro-activity by populations. Before commencing, however, it is important to define what is meant by undeclared work or what is sometimes referred to as the “cash-in-hand”, “informal”, “black”, “underground”, “hidden” and “shadow” economy/sector. Despite the diverse array of terms to denote this sphere as well as competing views of its relationship to the formal economy and different approaches towards tackling it, a strong consensus exists on what is included and excluded when discussing this form of work. Undeclared work is widely accepted as involving the paid production and sale of goods and services that are unregistered by, or hidden from the state for tax, benefit and/or labour law purposes but which are legal in all other respects (European Commission, 1998; Feige, 1999; Portes, 1994; Renooy et al., 2004; Thomas, 1992; Williams, 2006a; Williams and Windebank, 1998). As such, undeclared work is legal in all respects besides the fact that it is not declared to the state for tax, social security and/or labour law purposes. The provision of goods and services that are themselves illicit (e.g. drug-trafficking) are excluded, as are non-cash exchanges. There are, nevertheless, blurred edges. For example, depending on the tax regime, in some countries gift-giving is included and in others excluded. Public sector management approaches towards undeclared work In many spheres of public sector management seeking to elicit behaviour change amongst the population, it is now well understood that punishing people for doing something wrong (i.e. negative reinforcement) is relatively ineffective compared with positive reinforcement or rewarding good behaviour. Indeed, a vast body of research supports this conclusion in fields ranging from the effective personal management of diabetes (e.g. Parra-Medina et al., 2004), through how to motivate employees and provide effective leadership in organisations (e.g. Prewitt, 2003; Romero and Kleiner, 2000) to mitigating anti-social behaviour in schools and classrooms (Beaman and Wheldall, 2000; Luiselli et al., 2002). In all these fields and many others, it is now very rare to find punishments alone used to elicit changes in behaviour.

Is it the same, however, when analysing the approaches pursued by public sector management when tackling undeclared work? For several decades, and largely due to a widespread reading of undeclared work as low-paid sweatshop-like work conducted by employees for unscrupulous employers (e.g. Gallin, 2001; Grabiner, 2000), it has been the eradication of such work through its repression using deterrents that has been the dominant public sector management approach in most Western nations (e.g. Grabiner, 2000; Hasseldine and Zhuhong, 1999; Sandford, 1999). The overarching intention has been to change the cost/benefit ratio confronting those engaged or thinking of engaging in such work. This has been done by seeking to increase the actual and perceived risks and costs associated with participation. Deterrence measures have sought to increase not only the perceived or actual likelihood of detection but also the penalties for those caught. As Table I highlights, policy measures that come under the auspice of this repressive approach that seeks to deter participation thus include the use of sanctions and fines for those caught and the development of a whole manner of measures to improve the likelihood of detection, not least through improving the coordination of strategy, operations and data sharing. A repressive approach using deterrents, however, is not the only means available through which public sector management can tackle undeclared work. Indeed, one of the principal forces driving the need to rethink whether repression is the appropriate way forward has been recognition that much undeclared work is conducted by the self-employed engaged in entrepreneurial endeavour (De Soto, 2001; Small Business Council, 2004; Williams, 2006a). This has resulted in more attention being paid to whether it is sufficient to solely seek to punish those engaged in such work or whether greater emphasis needs to be placed on enabling them to move into the formal economy.

Approach

Measures

Examples of initiatives

Repressive

Improving enforcement

Cross-department data sharing Cross-national data sharing Joining-up strategy Joining-up operations “Working whilst claiming” fines increased Increasing penalties for tax evasion Increase penalties for flouting labour law Reduce regulations Reduce taxation Demand-side incentives: service vouchers/labour subsidies Supply-side incentives: simplification of regulatory compliance simplification of taxation business advisory & support services society-wide amnesties individual-level amnesties smoothing transition from unemployment to self-employment introducing new categories of legitimate work

Increasing penalties Enabling

De-regulation Incentives


Table I. Public sector management approaches towards undeclared work

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Enabling approaches, however, can take various forms. On the one hand, and for those of a neo-liberal economic persuasion, the need for an enabling approach directly arises from their reading of entrepreneurs operating in the undeclared sphere as heroes who are casting off the shackles of an over-burdensome state and their view of undeclared work as the “essence of liberalism” (De Soto, 1989; 2001; Sauvy, 1984). For De Soto (1989, p. 255) for instance, “the real problem is not so much informality as formality”. As one of the last bastions of untrammelled enterprise culture in an over-rigid economic system, neo-liberals view in the recent growth of undeclared work evidence of a resurgence of the free market against state regulation and union control and for them, “enabling” means adopting a laissez-faire approach towards undeclared work and a de-regulatory approach towards the formal economy. With fewer regulations, the notion is that the distinction between declared and undeclared work will disappear since all activities would be performed in a manner now called “undeclared”, although such activity would be legitimate since it would not be breaking any rules. In this variant of the enabling approach, therefore, measures to be pursued include a decrease in taxation and a drastic reduction in the regulations attached to formal employment. However, a more enabling approach is not only advocated by neo-liberals. There is a strand of social democratic thought that again views undeclared enterprise and entrepreneurship as an asset, but only if this endeavour can be harnessed and moved into the existing declared economy (ILO, 2002; Renooy et al., 2004; Small Business Council, 2004; Williams, 2006a). Such enterprise, if declared, would contribute to the development of an enterprise culture and the achievement of fuller-employment. As the ILO (2002, p. 8) state, the key policy issue is: . . . how to move workers and entrepreneurs currently in the informal economy upwards along the continuum [sic] into formal decent jobs and how to ensure that new jobs are created in the formal and not in the informal economy.

Indeed, in Western nations, this discourse is clearly expressed by the European Commission. As Anna Diamantopoulou, Commissioner for Employment and Social Affairs, so clearly puts it: Member states must increase efforts to quantify undeclared work, to cut it down and to transform it into regular employment. This is vital because of the direct link between combating undeclared work and hitting the Lisbon target of full employment by 2010 within a sound macroeconomic environment (European Commission, 2002, p. 1, author’s emphasis).

Unlike repressive approaches where the objective is solely to eradicate such work and neo-liberal enabling approaches where the intention is to de-regulate the formal economy, this emergent social democratic enabling approach seeks to facilitate the transfer of such work into the existing regulatory environment. To achieve this, deterrents or push measures (“sticks”) are seen as necessary but insufficient. They need to be combined with “pull” initiatives or “carrots” (e.g. European Commission, 2003a, b; Mateman and Renooy, 2001; Renooy et al., 2004; Small Business Council, 2004; Williams, 2005a, b; 2006a, b). This is clearly expressed in the European Commission’s Employment Guideline no. 9 on undeclared work, adopted on 22 July 2003, which asserts that there is a need for not only deterrents (or “sticks”) in the form of “improved law enforcement and the application of sanctions” but also a range of pull initiatives (“carrots”), namely a “simplification of the business environment” and the provision of “appropriate incentives in the tax and benefits system” (European Commission, 2003b).

As Table I displays, these can range from measures that seek to change the compliance system such as by simplifying taxation and regulatory compliance (rather than reducing it) through to a whole range of measures that seek to stimulate formalisation by targeting either customers or suppliers of undeclared work and providing them with incentives or help to move into the formal economy. Although this typology of public sector approaches for dealing with undeclared work presents a range of discrete approaches, it is important to state that in practice, a continuum of approaches needs to be conceptualised with wholly repressive or “push” approaches using the punishment of “bad” behaviour at one end of the spectrum and wholly enabling approaches that seek to provide incentives for “good behaviour” at the other. Given this, the next section uses this typology to explore what approach has been, and is being, adopted in EU members states towards undeclared work. Do EU member states remain entrenched in a repressive approach? Or are they adopting more enabling measures? If so, is it primarily de-regulation being used in the form of reduced taxation and regulation or is it more “pull” measures (“carrots”)? Evaluating public sector management approaches towards undeclared work in the European Union To chart the approaches adopted towards undeclared work by public sector management in EU nations and the direction of change, the documentary sources of evidence here analysed are the 2001 and 2003 National Action Plans for Employment (NAPs) and the National Reform Programmes 2005-2008 (NRPs). To complement the data derived from these documents, several international reviews of policy in this realm are also analysed, namely those of the European Employment Observatory (Autumn 2004) and the European Industrial Relations Observatory (EIRO) survey of national policy initiatives on undeclared work (2005). In each case, these sources were reviewed in order to see whether mention was made in them of the country adopting any of the repressive and enabling initiatives outlined in Table I. If any mention was made of such repressive, de-regulatory or incentive initiatives being used in the country, then it was denoted in Table II as possessing initiatives of this kind. This was based on the premise that if the country considered the initiative important enough to list in its NAP, NRP and so forth, then it passed the threshold of considering it a significant aspect of policy in that country. Of course, and given that some measures are often far more important than others in each and every country, the validity of using this to decipher the nature of the policy regime in a particular country is problematic. This will be returned to below. Table II summarises whether in each nation, repressive and enabling policy measures exist and the direction of change. Its overall finding is that in both 2001, 2003 and 2005, repressive policy measures were more prevalent across EU nations than enabling measures, although over time, there has been a rise in the prevalence of enabling measures. Examining the nature of these enabling measures, moreover, it is de-regulatory rather than incentive measures that have been most popular, although the 2005 data does reveal that the latter appear to be rapidly spreading across the EU. As such, the repressive approach that employs “sticks” to penalise bad behaviour appears to have become increasingly complemented by more enabling measures resulting in the advent of a combined approach in many nations that employs both “sticks” and “carrots” to tackle undeclared work.


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Table II. Measures adopted towards undeclared work in EU member states

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Malta Poland Portugal Slovakia Slovenia Spain Sweden UK Total ( £ ) Total (0)

Repressive approach Inspections/ enforcement Sanctions/fines 2001 2003 2005 2001 2003 2005 £ £

£ £

0 0

£

£

£

£ £0

£

£ £ £ £

£ £

£

£

Enabling approach De-regulation 2001 2003 2005 £

£ £ £

0

£ £

£

£ £

0 0

£

£

£

£ £ £

£ £

Incentives 2001 2003 2005 £ £0 0

0 0 0 0 0 £

£

£ £ £

0 0 0 £ £

£ 0

£ £0 £

9

£

0

£

£ £0 £ £ £ 0 10 8

£ £ £ 11

£ £

£0 £

£

£

£

£

£

£0 £

£0 £ £ 5

£ 3

0 2 2

5

10

£0 £0 0 6 13

£ 2

£ 6

0 8 7

Notes: £ ¼ 2001 and 2003 based on NAPs and 2005 on the NRP; 0 ¼ based on the European Employment Observatory (Autumn 2004) amd EIRO thematic feature, industrial relations and undeclared work (2005)

Analysing whether there are any variations by EU region, it appears that incentive measures were, with one or two exceptions, mostly employed in northern European nations until 2005 when a wider range of countries started to adopt such measures, although mostly only nations in the original EU-15. Few of the recent accession states have until now adopted an incentives approach, preferring instead to rely on repressive measures. Where enabling measures have been adopted in these nations, they have tended to be de-regulatory initiatives such as reducing regulations and taxes so as to facilitate formalisation. It is important, however, to understand the shortcomings of this analysis for achieving a full and comprehensive understanding of the nature and direction of public sector management in EU nations. Firstly, the data sources used are not always comprehensive in reviewing the initiatives pursued. In Denmark, for example, the existence of the Home Service Scheme (hjemmeserviceordningen) which has provided tax subsidies to households employing formal labour rather than undeclared work is

nowhere mentioned despite one in seven Danish households until recently using this scheme (Platzer, 2002; Sundbo, 1997). Secondly, and perhaps more importantly, this review of the existence of measures that punish “bad” behaviour and reward “good” behaviour in individual nations fails to provide any measure of the relative emphasis given to each in public policy. In the UK, for example, Table II intimates the advent of a more enabling approach with both de-regulatory and enabling initiatives being recently introduced. In practice, however, UK public policy remains firmly entrenched in a deterrence approach with de-regulatory measures confined to exemptions for small businesses from some regulations and incentive measures restricted to pilot initiatives, such as an experiment with providing business advice and support to undeclared workers in Hartlepool to help them make the transition to the formal economy (SBS, 2005). Overall, however, and like in many other EU nations, the UK remains firmly grounded in a deterrence approach (see Williams, 2005a, b). Great care should thus be taken not to use the data presented in Table II to over-emphasise the degree to which the conventional repressive approach has been transcended in EU nations. Discussion and conclusions This review of public sector management approaches towards undeclared work has revealed that although deterrence has been prominent, over time greater attention is starting to be paid to enabling measures to facilitate formalisation by either reducing taxes and regulations or providing incentives to those engaged in undeclared work to legitimise their endeavour. In parallel with public sector management approaches in other realms, therefore, where it is accepted that positive reinforcement of “good” behaviour is more effective at eliciting change than negative reinforcement of “bad” behaviour, the finding is that public sector management in EU member states appears to be belatedly starting to move away from solely a repressive approach and towards an approach that also seeks to stimulate good behaviour by rewarding compliance. Rather than leave the analysis here, however, in this final section I wish to further extend understanding of the approach public sector management adopts towards undeclared work by exploring whether there is a shift in approach away from using externally imposed bureaucratic control systems to generate reactive behaviours, and towards a more internalised post-bureaucratic approach that seeks to generate constructive pro-activity, and commitment to tax morality, by populations. In recent decades, that is, there has been a concerted shift in management thought away from direct to indirect control; from compliance to commitment (Guest, 1987; Legge, 1995; Watson, 2003). This has been variously referred to as a shift from “hard” to “soft” human resource management, or from bureaucracy to post-bureaucracy. Analysing the approach of the public sector towards undeclared work through this lens, it appears that despite the shift towards positive reinforcement measures, such organisations remain firmly entrenched in a bureaucratic approach that is using externally imposed direct control systems to generate reactive behaviours, albeit using incentive measures that are more effective at eliciting such behaviour change. It does not appear that a post-bureaucratic approach has been pursued. However, it is not difficult to see how such a post-bureaucratic approach might be pursued, especially when one recognises that much of the emergent literature on post-bureaucracy recognises the prevalence of “hybrid” forms of managerial practice that combine both direct and indirect control methods (e.g. Du Gay, 2005; Reed, 2005;


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Thompson and Alvesson, 2005). There is no reason why the public sector could not combine direct compliance methods or bureaucratic controls, which involves either using punishments to prevent “bad” behaviour and/or direct incentives to elicit “good” behaviour, alongside and in combination with more indirect methods to capture the “hearts and minds” of the population with regard to the benefits of declared work. To engender a shift from compliance to commitment, a first step to encourage the advent of a “high commitment” society would be to therefore implement awareness campaigns that seek to persuade people of the benefits of declared work by highlighting the services funded by taxation in order to improve overall tax morality. Although engendering a high commitment approach by encouraging “buy in” to an organisation’s objectives is widely adopted in contemporary management practice, it has been until now seldom applied on a societal level by public sector management to issues such as tackling undeclared work. This perhaps reflects how it is policy-makers rather than managers who are initiating the changes in approach towards this sphere. If managers were to drive such an agenda, then perhaps this incorporation of a post-bureaucratic approach, so prominent in the internal management practices of both private and public sector organisations, might start to come more to the fore when dealing with undeclared work. Of course, whether such a hybrid approach, which complements direct control measures with more indirect approaches to captures “hearts and minds”, is the appropriate and most effective approach for tackling undeclared work, and how to implement indirect controls at a society-wide level to elicit greater tax morality, are beyond the scope of this paper. What is certain, however, is that the conventional punitive approach cannot continue. Such an approach will lead to the public sector repressing with one hand precisely the enterprise and enterprise culture that with another hand it is seeking to foster. There is a need, therefore, for new thinking about how to tackle undeclared work. If this paper encourages more thought on the alternative ways forward amongst public sector managers and policy-makers, then it will have achieved its objective. References Beaman, R. and Wheldall, K. (2000), “Teachers’ use of approval and disapproval in the classroom”, Educational Psychology, Vol. 20 No. 4, pp. 431-46. De Soto, H. (1989), The Other Path: The Economic Answer to Terrorism, Harper and Row, London. De Soto, H. (2001), The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Black Swan, London. Du Gay, P. (2005), “The values of bureaucracy: an introduction”, in du Gay, P. (Ed.), The Values of Bureaucracy, Oxford University Press, Oxford. European Commission (1998), “Communication of the Commission on Undeclared Work”, available at: http://europa.eu.int/comm/employment_social/empl_esf/docs/com98-219_en. pdf (accessed 9 July 2006). European Commission (2001), NAP: National Action Plans on Employment 2001, available at: http://ec.europa.eu/employment_social/news/2001/may/naps2001_en.html European Commission (2002), Commission Calls on Governments to Do More to Fight the Shadow Economy, Press Release IP/02/339, European Commission, Brussels.

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