The level of informality in the economy and employment in the Western Balkans

The estimated size of the informal sector in Albania is well above the EU average and at the upper end of the Western Balkan countries (WB6) in terms of employment, as seen in the table below.

Informal employment includes undeclared work and income that would add to GDP and tax revenue if reported. Envelope wages constitute a significant part of informal employment, where a lower wage is officially reported to minimize tax and social security payments, while the remaining wage is paid informally, usually in cash, hidden from the state.

The European Commission estimates the size of the informal sector including agriculture in Albania at 30–35 percent of GDP and employment, while the ILO estimates that up to 56.7 percent of total employment (including the agricultural sector) may be informal in Albania.

Based on the 2020-2021 Labor Force Survey, INSTAT, the Albanian State Statistics Institute, estimates that there is 29.4 percent of informal employment in non-agricultural sectors. The government’s draft Medium Term Income Strategy (MTRS) for 2022-2026 assumes 39 percent of informal workers and 29 percent of workers who underdeclared wages as a base for 2019.

In terms of GDP, the IMF estimates that the informal economy reached 27.2 percent of GDP in 2019.

According to the IMF, factors of high informality in Albania and other countries include perceived corruption and lack of trust in official institutions, society’s acceptance of informality, weak law enforcement, burdensome tax administration, and the prevalence of cash-based transactions. money.

According to a 2016 survey, 72.9 percent of businesses in Albania saw corruption as the most important factor in the existence of the hidden economy, while the equivalent figures for North Macedonia and Kosovo were 45.7 percent and 48.6 percent, respectively.

Tax administration was also cited as a major burden by 29 percent of respondents surveyed in Albania by the World Bank Enterprise Survey 2019, compared, for example, to 4.6 percent in Serbia, suggesting burdensome tax administration processes in Albania.

Moreover, cash payments, which are more difficult to track than electronic ones and therefore associated with higher levels of informality, are still very common in Albania.

In the presence of high informality, the tax system must be based on a relatively small number of taxes with a single rate or small tax rates on a broad basis.

In this context, it is also important to increase the stability of the tax system by minimizing frequent changes. This facilitates assessment and administration, especially when capacities are limited. While sophisticated tax rules can help improve efficiency and equity, they are costly to assess and control for the administration, and to comply with for taxpayers.

According to the latest IMF report, Albania has struggled to narrow the income gap compared to EU countries. Several reinforcing barriers are hindering productivity. These include widespread informality, weaknesses in governance and the rule of law, significant gender gaps in the workforce, high youth inactivity and gaps in infrastructure. Labor emigration and a rapidly aging population pose additional threats to income growth.