In this report, we have estimated the size of labor market crime in Norway between 1973 and 2015. Labor market crime is characterized by profit-driven crime in the labor market. The phenomenon is complex and include various offenses. Actions related to labor market crime include violations of the pay and working conditions, tax evasion and social security fraud.
Both employers and employees may have incentives to commit such actions, but the society will always lose. Labor market crime results in loss of income for law-abiding businesses, deterioration of individual industries, and unfair competitive conditions for law-abiding businesses.
There is an increasing awareness that labor market crime represents a major social problem. Both former and present governments have compiled strategies, and implemented several measures to combat such crime. Nevertheless, there is a lack of information on of the scope. Better knowledge about and understanding of the scope of this form of crime is necessary to implement appropriate measures.
Two estimation methods are combined to calculate the development of labor market crime
Criminal acts are hidden, and hence are difficult to identify. It is therefore necessary to use special estimation methods, to estimate the scope. In general, these methods can be divided into direct approaches (when one has access to crime data from the control agencies) and indirect approaches (when one does not have such data). However, there will always be considerable uncertainty attached to this type of analysis.
In this project, we have been granted access to rarely available data for revealed tax evasion. Therefore, we can utilize both direct and indirect approaches. The direct approach gives us an estimate of the level of labor marked crime in Norway as a share of GDP, while the indirect gives us the development over time.
In our direct approach, we utilize control data for Norwegian businesses to calculate the value of labor market crime related to taxation and fraud of social security. The size of tax evasion is calculated from predicted probabilities for labor marked crime for all businesses in Norway. Combined with social security fraud figures from NAV, it gives us an estimate of the level of labor market crime, measured as a share of GDP.
Then we have used an indirect approach called MIMIC (Multiple Indicators Multiple Causes) to estimate changes in the size of labor market crime over a longer period (1973 to 2015). In this model, we use cause and indicator variables, which are assumed to be highly correlated with labor market crime, to say something about the changes of labor market crime over time.
The size is estimated based on tax evasion and hidden created value
We use two different measures of tax-related labor marked crime. The first one calculates the amount of tax evasion. The second one calculates the size of created value associated with illegal activities that are hidden from the outside world. Calculations of tax evasions have been carried out previously, but not related to labor market crime. The hidden created value, as far as we know, has never been estimated. We estimate hidden created value using data for unreported income and social security contributions that were revealed by controls. We believe that this estimate captures more of the activities related to tax evasion. This is because created value captures both black labor and tax evasion, as well as the fact these businesses often also commit other offenses (for example breach of the Working Environment Act). Therefore, we find that the measure based on created value provides significantly higher estimates, than when based on tax evasion only.
To estimate the scope of social security fraud, we have utilized aggregate statistics from NAV and existing literature. To create a level of labor marked crime as a share of GDP, we add the estimate of the average social security fraud to the results of tax-related labor market crime.
Tax evasion amounted to around NOK 12 billion in 2015, while hidden created value amounted to NOK 28 billion
The figure below illustrates our main estimates for the scope of labor market crime in Norway. The different paths represent the estimates based on tax evasion and hidden created value, both as part of mainland GDP. Estimates for 2010 to 2014 are based on microdata and have a greater yearly volatility relative to the earlier years, which are based on predictions from the indirect approach.
For 2015, we estimate that the share of labor market crime measured with hidden created value, was 1.2 percent of mainland GDP, or about NOK 28 billion. This includes both hidden income and social security contributions, in addition to an estimate of relevant social security fraud. If we consider labor market crime as tax evasion and social security fraud, the proportion is 0.5 percent, or about NOK 12 billion.