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Envelope Wages in Bosnia and Herzegovina: Incidence and Distributional Implications

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Towards Economic Inclusion in the Western Balkans


Envelope wages are a widespread phenomenon in Bosnia and Herzegovina (BiH). This paper compares data from Household Budget Survey and administrative tax records to produce the estimates of the extent and distributional implications of envelope wages in BiH. We first estimate the extent of underreporting of income by re-creating the joint distribution of the actual and reported taxable income. Then, these estimates are used in a microsimulation model to calculate the fiscal and distributional implications of such underreporting, controlling for other direct taxes, benefits and their interactions. The evidence produced suggests that the average rate of underreporting in BiH is 6.7% overall, with a larger presence among the male and younger population. Moreover, the findings suggest that envelope wages reduce poverty and inequality levels, as well as government revenues. The evidence is policy relevant as it provides important insights for the design of policies tackling tax evasion and improving social protection in BiH. The paper is unique, since it offers evidence about envelope wages for the first time in BiH, as well as being the first example of research based on a combination of administrative and survey data in BiH.

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  1. 1.

    Envelope payments work in a way that employers pay the employee officially a lower salary than the average for a similar job, while the rest pay in cash. Only the part of the salary which is officially declared serves as a basis for paying social security contributions.

  2. 2.

    Full period available. Labour Force Survey in BiH started in 2006.

  3. 3.

    The youth unemployment rate (15–24 age group) was 36.6% in 2020 according to the Labour Force Survey data

  4. 4.

    There are three different tax schemes, but harmonised, in three different federal administrative units of the country (Federation of Bosnia and Herzegovina, Republic of Srpska and Brčko District), which allows for a comparison between them.

  5. 5.

    With the fertility rate of 1.2, BiH is among the countries with the lowest fertility rate in the World, according to UNFPA. See:

  6. 6.

    Elaboration made based on authors’ own calculation of employment rates from Labour Force Survey dataset for the period 2011–2019 and Eurostat data for EU-27 countries.

  7. 7.

    The administrative data contain tax records of around 160,000 tax payers from 2014 in Republika Srpska and around 450,000 taxpayers from 2015 in Federation of BiH.

  8. 8.

    The HBS survey sample is composed of 7400 households. The income variables partially cover data from 2014 for those that are surveyed at the beginning of 2015.

  9. 9.

    BiHMOD is a microsimulation tax-benefit model for Bosnia and Herzegovina based on EUROMOD developed by researchers in CREDI; see More information about model macro-validation results can be found in Kurta and Oruč (2020).

  10. 10.

    According to BiH administrative division and applicable legislation, different tax systems are present in these two administrative units.

  11. 11.

    BiHMOD uses HBS instead of SILC (Survey on Income and Living Conditions), which is the data source for most other national EUROMOD-based models, since the SILC is not yet conducted in BiH. The HBS from 2015 is the latest available dataset.

  12. 12.

    There is evidence on such practice reported to authors by employees from specific sectors such as retail, and by low-skilled workers such as cleaners.

  13. 13.

    The impact on poverty is assessed in terms of the headcount ratio, with the relative income threshold set at 50% of median household disposable income (adjusted for household size using the modified OECD equivalence scale).

  14. 14.

    The tax scheme is different in the two administrative units (FBiH and RS). All tax deductions were produced for household heads only, while for other family members only personal income tax deduction was applied because data in HBS did not allow to link other family members outside the surveyed households.

  15. 15.

    BAM stands for the Bosnian convertible mark, the BiH national currency, set at a fixed exchange rate to the euro at 1.95583 BAM for 1 euro.


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Correspondence to Amela Kurta .

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Kurta, A., Oruč, N., Kramer, D. (2022). Envelope Wages in Bosnia and Herzegovina: Incidence and Distributional Implications. In: Bartlett, W., Uvalić, M. (eds) Towards Economic Inclusion in the Western Balkans. New Perspectives on South-East Europe. Palgrave Macmillan, Cham.

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