Explaining and tackling envelope wages in the Baltic Sea region

Colin C Williams, Ioana Alexandra Horodnic
2015 Baltic Journal of Management  
Purpose The aim of this paper is to advance a new way of explaining and tackling the illegitimate wage practice where employers pay their employees an undeclared (envelope) wage in addition to their formal salary. Drawing upon institutional theory, it is here proposed that envelope wages result from the lack of alignment of a society's formal institutions (i.e., the codified laws and regulations) with its informal institutions (i.e., the socially shared unwritten understandings which reflect
more » ... izens' norms, values and beliefs). Methodology To evaluate this, data is reported from a 2013 Eurobarometer survey involving 1,738 face-toface interviews with formal employees in four Baltic countries, namely Estonia, Latvia, Lithuania and Poland. Findings The finding is that the greater is the asymmetry between the formal and informal institutions (i.e., the level of disagreement of citizens with the codified laws and regulations of formal institutions), the higher is the propensity to pay envelope wages. This is the case at both the individual-and country-levels. Practical implications To reduce the prevalence of envelope wages, the resultant argument is that the values of employers and employees need to be aligned with the formal institutions. This requires alterations not only in the informal institutions, using measures such as tax education, awareness raising campaigns and normative appeals, but also changes in formal institutions so as to improve trust in government by fostering greater procedural justice, procedural fairness and redistributive justice. Originality/value This is the first paper to apply institutional theory to explaining and tackling envelope wages in the Baltic Sea region.
doi:10.1108/bjm-10-2014-0153 fatcat:forhmae3w5botci4gbvtcbxo6q