Abstract

The paper addresses the phenomenon of paying employees some of their earnings outside formal employment relationships. This involves paying them in two parts. One is officially set out in their employment contract. The other results from an unwritten and informal arrangement between the employee and the employer. This part is handed over in cash and not included in records (unreported). This phenomenon is referred to as “envelope wages”. In cases when employees earn some of their remuneration informally, we refer to their reported (formal) income or to their actual (true) income (the latter is the sum of their formal and informal income).
Using data from Structure of Earnings Survey and Household Budget Survey, we develop a methodology for measuring the scale of the unregistered wages paid to staff by employers. We show that the differences in earnings distribution between public- and private-sector employees are not reflected in the distribution of expenditure. Assuming that public-sector employees do not receive unreported income, this points to undisclosed income in the private sector. After showing that the distribution of income from non-wage sources does not systematically depend on the sector, we argue that the differences may be attributed to envelope wages. We estimate that 10-11% of employees in Poland receive envelope wages, which account for around 5% of total earnings.