Abstract
There are two particular issues of the Serbian labor market of extreme importance in the recent debate: the high levels of inactivity and informal employment among the Serbian working-age population. Both of these issues lead to the question if it is actually “worthwhile” for the working-age population to engage in income-generating activities in Serbia. This chapter focuses on the role of labor taxation and social benefit design, how it relates to informal employment and inactivity, and what disincentives for formal work might be provided to people in working age so they choose to “exit” into informality or inactivity.
The analysis shows that there are three main reform options to decrease informal employment and to activate the inactive (1) to make formal work pay for low-wage earners, (2) to genuinely means test any entitlements to free health insurance or other municipal entitlements, and (3) to step up inspections and enforcement. The two main policy tools to make formal work pay are to decrease labor taxation at the lower wage levels and to reform benefit design for social assistance and family benefits.
Keywords
- Social Assistance
- Social Security Contribution
- Informal Worker
- Labor Taxation
- Informal Employment
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
Michael Weber contributed to the empirical analysis focusing on integrating income data from the household budget survey with data from the labor force survey. Background papers have been provided by Nikica Mojsoska-Blazevski, Victor Macias, Sasa Randjelovic, Bojan Ristic, and Jelena Zarkovic Rakic. This chapter greatly benefited from a close cooperation with Tatiana Gordine, Herwig Immervoll, and Dominique Partout at the Social Policy Division of the Organisation for Economic Co-operation and Development (OECD). Generous financial support has been provided by the governments of Austria, Germany, Korea, and Norway through the Multi-donor Trust Fund on Labor Markets, Job Creation, and Economic Growth.
The views and opinions expressed in this chapter are solely those of the authors and do not represent the views and opinions of the World Bank, its board of Executive Directors, or the countries they represent.
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- 1.
The literature acknowledges that the share of informal employment might be pro-cyclical or countercyclical, although in most countries, it appears to be countercyclical. For a literature overview on this topic, see Perry et al. (2007).
- 2.
In Serbia, full-time work at 33% of the average wage is below the legal minimum wage, but the same tax wedge applies to someone receiving average wage but working 33% part-time. The same holds for most other countries, although there can be slight variations of the tax wedge for part-time workers.
- 3.
The assumed relationship is that tax systems need to raise a certain fixed amount of resources, and those that put higher taxes on lower wages have less of need to increase taxes at higher wages and hence display less progressivity.
- 4.
The terms mini-jobs and midi-jobs originate from the social welfare reforms (Hartz IV) in Germany in the early 2000s, which aimed at making work more lucrative for low-wage earners in this labor market segment.
- 5.
Only workers who are not registered at all are considered; partially formal workers who underreport their wages are not considered.
- 6.
For a detailed definition and discussion of the FTR, see Koettl and Weber (2012).
- 7.
Clearly, no causality between high work disincentives and high levels of informal employment can be established without further empirical analysis. Koettl and Weber (2012), though, using similar concepts and a more elaborate empirical analysis find a strong positive correlation between work disincentives (METR, FTR) and informal employment in six new EU member states.
- 8.
The matching procedure only takes into account labor income, not income from agriculture, self-employment, capital income, or other forms of income.
- 9.
Only about 8% of the population is currently not covered by the Serbian health insurance fund (HIF).
- 10.
Arguably, the role of social assistance in providing disincentives for formal work for a large number of people might be limited. About 170,000 people—including children and elderly—currently benefit from social assistance in Serbia, which is about 2.5% of the population, although the numbers have been increasing rapidly in recent months. In any case, as the social safety net of Serbia is being modernized, the disincentive effect and the marginal effective tax rate should be kept in mind.
References
Eurostat (2010) Statistics Database. Available at http://ec.europa.eu/eurostat.
Hussmanns, R. (2003) Statistical definition of informal employment: Guidelines endorsed by the Seventeenth International Conference of Labour Statisticians (2003). Geneva, Switzerland: International Labour Organization.
Koettl, J. and M. Weber (2012) “Does Formal Work Pay? The role of labor taxation and social benefit design in the New Member States.” Research in Labor Economics. 34:167–204.
Perry, G., W. Maloney, O. Arias, P. Fajnzylber, A. Mason, and J. Saavedra-Chanduvi (2007) Informality. Exit and Exclusion. Washington, D.C.: World Bank.
World Bank (2009) BEEPS at-a-Glance 2008–09. Serbia. Washington, D.C.: World Bank.
World Bank (2010) World Development Indicators. Washington, D.C.: World Bank. April.
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Appendix Table 9.8 Number of tax payers in contributors to social security in Bosnia and Herzegovina—Republika Srpska, Macedonia, and Serbia
Appendix Table 9.8 Number of tax payers in contributors to social security in Bosnia and Herzegovina—Republika Srpska, Macedonia, and Serbia
2006 | 2007 | 2008 | 2009 | Average annual change (%) | |
|---|---|---|---|---|---|
Bosnia and Herzegovina—RS | |||||
Number of registered payers of taxes and contributions | n.a. | 974,976 | 1,121,126 | 1,197,456 | 10.9 |
Macedonia | |||||
Number of registeredcontributors to pension fund | 394,882 | 424,338 | 451,491 | n.a. | 6.9 |
Individuals filing tax reports on nonwage income | 19,447 | 77,017 | 120,396 | 150,569 | 125.8 |
Serbia | |||||
Number of registered payers of taxes and contributions | n.a. | 2,188,503 | 2,229,236 | 2,162,145 | −0.6 |
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Koettl, J. (2013). Does Formal Work Pay in Serbia? The Role of Labor Taxes and Social Benefit Design in Providing Disincentives for Formal Work. In: Ruggeri Laderchi, C., Savastano, S. (eds) Poverty and Exclusion in the Western Balkans. Economic Studies in Inequality, Social Exclusion and Well-Being, vol 8. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-4945-4_9
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