Informal employment in Ukraine: causes, consequences, possible solutions

Publication date: January 20, 2021

Author: Nina Gaievska, communication manager of the LDN
English translation by Nadiia Vanteeva

It’s already been more than a month since the research project on informally employed people’s legal issues has started. This project is implementing by Legal Development Network with support provided by the International Renaissance Foundation. The project team has already begun providing legal advice to this category of people and carefully preparing the ground for a “field” study. Further, we talk about the first results and answers to the most relevant questions that the project experts managed to investigate during the cabinet (analytical) study. 

Quick reminder, the Legal Development Network, with the support of the International Renaissance Foundation, launches a new socially important project “The impact of the COVID-19 pandemic on the legal needs of informally employed people in Ukraine”.

Project expert Natalia Kulikova answers questions on essential aspects of the problem analyzed during the cabinet (analytical) study within the framework of our project. 

Natalia, could you please explain what “informal employment” is?

It’s an interesting question. First of all, informality is a complex, multidimensional and confusing social phenomenon. By the way, this problem is common not only for the post- Soviet countries or Ukraine. Any country can face it, regardless of the level of economic development, but in different ways. The informal economy covers more than half of the world’s workforce and more than 90% of micro and small businesses worldwide. 

Informal employment is the total number of all informal jobs for a certain period in any formal or informal business or household. In fact, these are informal sector activities, which occur when the country’s economy cannot meet people’s needs.

What’s the scale of this problem in Ukraine? 

It was found that in 2020, in Ukraine, 26.5% of the economically active population – which is more than 4 million people – receive hidden income. Unofficial revenues of the economically active population are more than 22 billion 543 million UAH. At the same time, the calculated assessment is underestimated since it does not take into consideration the contribution of people with a “very high profit”.

However, recent years showed a tendency towards reducing the level of informal employment. According to experts, almost the entire Ukraine population is involved in the informal economy in some ways. 

A very illustrative infographic was posted in the Statistical Collection of the State Statistics Service of Ukraine: “Economic Activity of the Population of Ukraine 2018” (in Ukrainian):

—We understand the negative consequences of informal employment both for the country and for informally employed people themselves. 

Yes, that is why we started this project in the first place. No one has previously conducted a thorough study, and people are not aware of the dangers they are exposing themselves to while working informally. 

Analyzing the situation during this cabinet study, we concluded that improper level of compliance with legal rights of Ukrainian citizens in labor relations leads to legal problems due to:

• poor working and employment conditions, as well as the unsafe working environment;
• reduction in wages and/or its delays; 
• the unlawful imposition of fines, violation of agreements on the amount of salary, etc. (especially it concerns the rights of migrant workers);
• obstruction of employee’s professional development and official recognition of the acquired knowledge and skills; 
• illegal or unreasonable termination of employment; 
• obstruction of participation in the collective protection of labor rights; 
• impossibility to legally secure property rights and economic contracts of undeclared self-employed persons;
• obstruction of prospects for long-term and sustainable development; 
• creating unfair competition, when companies and self-employed people that conscientiously comply with the law lose in competition because of expenses for entrepreneurial activities; 
• reduction of tax revenues, which may lead to the inability of the state to provide public services (e.g., healthcare, education, justice, defense, security, etc.) and, ultimately, to the need of raising tax rates for law-abiding entities; 
• increased pressure on the social security system along with a decrease in income, which may jeopardize its ability to continue providing social security services to people. 

And eventually, there is a situation in the sphere of social protection, where people, who didn’t take part in the financing of the state and social funds, use social services and benefits. In other words, without paying taxes, a person uses public services, which are provided at the expense of tax revenues. For example, informally employed people receive a social pension, certain social benefits (assistance for internally displaced persons (IDP), maternity benefits, subsidy for housing and communal services, etc.).

Besides, limiting the government’s ability to fulfill its social obligations in state supervision over observance of labor and employment laws, social security protection against unemployment, temporary and permanent disabilities, pension provision, etc., leads to the insecurity of its citizens.

How did the COVID-19 pandemic and quarantine affect informally employed persons?

— The situation in 2020, pandemic and quarantine, exacerbated the problems of both the state and the people themselves, who were left without those services and financial benefits provided by the state to people in need. The study revealed both negative and positive effects of the COVID-19 pandemic on the modern labor market’s functioning. Thus, the key negative consequences of the COVID-19 disease outbreak are: 

• the threat to the health of Ukrainian citizens
• the decrease in economic activity and restriction on movement of people
• delay of investment processes
• the decline in the number of job vacancies
• reduction of hours worked
• the decline in the labor supply
• decrease in employment
• dissemination of part-time and informal employment
• unemployment increase
• wages cutbacks
• considerable loss of ’employee’s income
• deterioration of the situation on social protection of the population
• the emergence of “working poor”
• the rise in inequality.

Simultaneously, among the positive consequences of the coronavirus disease pandemic COVID-19, one should mention the acquisition of new experience by Ukrainians — working from home, taking advantage of modern technologies’ opportunities. However, it is necessary to mention that remote work requires employees to obtain additional work skills.

Could you clarify who is classified as informally employed persons?

During the study, we divided individuals involved in informal employment into several groups as those who:

1. Work informally (refusal in legal employment or personal desire not to formalize the employment relationship);
2. Receive part of wages informally (“in an envelope”);
3. Provide “home” services;
4. Work informally in combination;
5. Perform temporary or one-time services.

I want to emphasize the fact that there are different groups of people in the status of informal employment.

Firstly, efficient people who have had professional training and could work in the official/formal economy but can not find a decent job and do not agree to work on the conditions they are offered.

Secondly, people who have an official/formal place of work but due to low income, have secondary jobs in informal employment.

Next, people who, due to the loss of working capacity (age or illness), can not compete equally in the sectors of the official economy and therefore are forced to work in the informal sector.

Finally, individuals who are scared of high taxes and strict control over their activities so that they do not register their work activities.

I think our readers will be interested in conclusions that you’ve made based on the study?

So far, I can only say that the data on undeclared labor, both in the world and in Ukraine, is incomplete. Although different organizations are constantly collecting it at the national level.

We think that the main task for today is to reduce informal employment. First of all, it is necessary to direct all the efforts to eradicate the leading causes of its emergence and development, while not forgetting the circumstances of every group mentioned above. The approach to regulating such activities should be different, so are the ways of influence, all depending on a group.

Natalia, what are your expectations for the project? And how do you measure its success? 

Our team plans to focus on research of the causes and consequences of the same legal issues for informally employed, met in the field of employment.

In general, the project was initiated to obtain relevant data on the legal needs and problems of informally employed persons and develop recommendations for solving these problems to plan an advocacy campaign aimed at addressing this issue or at least improving the situation. 

As for expectations, they are relatively high, because according to the study results on legal needs and problems of informally employed, an analytical report with key conclusions and recommendations will be prepared. It should become an evidence-based base to start the public discussion on labor rights and informal employment issues.

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