Academic journal article International Journal of Economic Development

Demand-Side Incentives to Combat the Underground Economy: Some Lessons from France and Belgium

Academic journal article International Journal of Economic Development

Demand-Side Incentives to Combat the Underground Economy: Some Lessons from France and Belgium

Article excerpt

Abstract

This paper evaluates critically the currently dominant public policy approach towards underground work that primarily pursues supply-side deterrence measures and then investigates how demand-side incentives might be used to supplement this approach. To show how this could be achieved, the experiences of France and Belgium where voucher schemes have been used to encourage customers to use formal rather than underground labor are evaluated. Analyzing the Local Employment Agency and Service Voucher schemes in Belgium and the Cheque Emploi Service (CES) and Titre Emploi Service (TES) schemes in France, this paper finds that given the evidence of their apparent effectiveness in combating underground work in these countries, there is a case for other advanced market economies giving greater consideration to complementing their supply-side deterrence measures with similar demand-side incentives.

Introduction

The aim of this paper is to evaluate critically the currently dominant public policy approach towards underground work in advanced market economies that relies heavily on applying supply-side deterrence measures and then to investigate how demand-side incentives might be employed to supplement such an approach. To do this, the ways in which demand-side incentives have been used to combat underground work in France and Belgium will be evaluated. Firstly, the Local Employment Agencies scheme in Belgium will be evaluated, secondly, the Service Vouchers Scheme again in Belgium, thirdly, the Cheque Emploi Service scheme in France and fourth and finally, the Titre Emploi Service scheme again in France. The outcome will be to show that these schemes clearly display that there is perhaps a need in advanced market economies to move away from using solely supply-side deterrence approaches and for greater consideration to be given to supplementing such measures with demand-side incentives when seeking to combat the underground economy.

To reveal this, the paper firstly provides a brief review of how public policy towards the underground economy predominantly adopts a supply-side deterrence approach in most advanced market economies and how this has resulted in little attention being given to either demand-side approaches or incentive systems when tackling underground work. Following this, attention turns toward exploring the potential of a demand-side incentives approach by evaluating four initiatives that have been pursued. These are the Local Employment Agencies and Service Vouchers schemes in Belgium and the Cheque Emploi Service and Titre Emploi Service schemes in France. Having reviewed these initiatives, the paper will then conclude by evaluating whether demand-side incentive schemes might be adopted in other advanced market economies as a way of tackling the underground economy.

Throughout this paper, the underground economy is defined in the conventional and widely accepted manner as involving the paid production and sale of goods and services that are unregistered by, or hidden from the state for tax and/or welfare purposes but which are legal in all other respects (European Commission, 1998; Portes, 1994; Thomas, 1992; Williams and Windebank, 1998, 2001a,b). Underground work, therefore, includes only paid work that is illegal because of its non-declaration to the state for tax and/or social security purposes. It excludes paid work in which the good and/or service itself is illegal (e.g., drug trafficking).

From Supply- to Demand-Side Public Policy Approaches

In the advanced market economies, the predominant way in which public policy has sought to eradicate the underground economy is by pursuing supply-side deterrence measures. In other words, most of the effort of governments has been on curtailing people from supplying off-the-books labor by constructing a range of deterrents. The principal way in which this has been achieved is by seeking to increase the probability of detection and the level of punishments meted out to those caught. …

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