Who is to blame for the lack of labor formalization in 2025?

The obstacles to wage formalization stem from multiple causes and involve various actors who influence Albania’s economy and labor system. There is no single party solely responsible; instead, a combination of factors and actors contribute to the persistence of informality.

1. Employers’ Responsibility

In the labor market, especially among small and medium-sized enterprises (SMEs), employers often show a strong tendency to keep wages outside the formal system. This is not accidental, but a conscious strategy to reduce the tax burden and social contributions, thus securing a competitive edge and maintaining business liquidity. Their motivation for this practice rests on three primary factors: avoiding high taxes, enhancing competitiveness, and increasing available capital for investment.

One of the most critical drivers pushing employers toward informality is the high level of tax burden and social security contributions. For many businesses—especially SMEs—these costs are perceived as unaffordable, pushing them to seek alternative ways to reduce their financial exposure.

When an employer pays an employee formally, they must cover:

• Personal income tax, applied on the employee’s gross salary.
• Social and health insurance contributions, which represent a significant portion of labor costs.
• Additional employment fees and charges, that increase the total cost of maintaining a registered employee.

In a context where these financial obligations are high and state monitoring mechanisms are weak, employers find it more convenient to avoid these payments by paying employees “under the table.” This not only saves them from a substantial tax burden but also grants them greater flexibility in managing their financial resources.

In many sectors—particularly trade, construction, tourism, and services—competition is fierce and often price-driven. To survive in the market and offer competitive services or products, employers seek to minimize operating costs. One of the most common ways to do this is by avoiding formal wage payments, which significantly reduces labor expenses.

If an employer formalizes all salaries, they face higher costs than a competitor paying in cash. This creates an unfair advantage for informal businesses and discourages those trying to operate honestly. As a result, many feel “forced” to adopt the same strategy to remain competitive.

Another reason employers avoid wage formalization is the desire to retain more liquid capital for investment or to better manage business cash flow. When taxes and contributions on wages are evaded, employers have more free funds to invest, purchase new equipment, or cover other operating costs.

For small businesses—often operating with narrow profit margins—the ability to maintain a financial buffer is key to survival. Many see no immediate benefit from formalizing wages, as it would reduce their liquidity and place them in a tougher financial position.

Although this strategy may seem beneficial to individual businesses in the short term, it has many negative consequences for the national economy and labor market stability.

2. Employees’ Responsibility

In an economy where informality is widespread, responsibility does not rest solely on employers or supervisory institutions, but also on employees themselves. They often accept this system not only as a necessity to maintain employment but also as a short-term gain strategy.

In labor markets with low stability and limited job opportunities, employees often feel compelled to accept informal conditions to secure their livelihood. Job insecurity leads them to forgo their rights and avoid confrontation with employers, as the alternative—total income loss—is worse. Thus, they become part of a system where avoiding pension contributions, health insurance, and legal employment protections is seen as a necessary evil.

Some employees do not see this as mere imposition, but as an immediate advantage. They may believe that receiving cash-in-hand wages is more beneficial since it gives them a higher net income. By avoiding social insurance and tax deductions, they take home more money in the short term. However, this is an illusion: in the long term, they remain exposed to significant risks—lack of health protection, low or nonexistent pensions, and no legal security in case of employer disputes.

When employees accept this model, they legitimize and reinforce it, making change harder. The more individuals who accept informal pay, the more widespread and “normalized” the phenomenon becomes. Employers, seeing a constant supply of workers who do not demand their rights, have no incentive to change. Honest employers face unfair competition from informal operators who enjoy lower costs. Thus, the cycle continues and becomes increasingly difficult to break.

Beyond individual impact, this phenomenon has serious consequences at the national level. When a large portion of the workforce avoids contributions, the social security system weakens, resulting in a lack of funds for pensions and healthcare. This increases the burden on the few individuals and businesses operating legally, creating an unfair and unsustainable system.

Change requires a combination of institutional reforms and a shift in employee mentality. Raising awareness of the long-term consequences of informality is essential, alongside strengthening institutions that ensure a fair and protected labor market.

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3. Responsibility of Government and Tax Authorities

Under the shadow of a bureaucracy-heavy administration and an inability to effectively enforce its own rules, informality flourishes. The tax administration and oversight institutions—meant to be pillars of transparency and equality in the labor market—often remain weak in the face of a reality where system abuse is the norm rather than the exception.

A lack of sufficient capacities—both technical and human—creates a dangerous gap exploited by employers and employees to evade fiscal obligations. A complex tax system, which complicates more than facilitates processes, leaves room for evasion, while insufficient monitoring only reinforces this approach. In this environment, informality is not an accidental phenomenon, but a deeply rooted practice in the everyday economy.

What makes this problem even deeper? Beyond resource and inspection mechanism limitations, a key factor is the lack of meritocracy in institutional leadership. Instead of being led by qualified professionals and field experts, many institutions fall prey to political patronage. When appointments are based not on competence and integrity but on loyalty and political ties, administrative effectiveness drops sharply. This creates a weak control system where decision-making is often driven by narrow interests rather than the need for a fair and sustainable economy.

As a result, inspections become rare and selective—often targeting those without political backing, while the powerful remain untouched. This not only deepens inequality but turns the tax system into an unfair mechanism where those following the rules are punished with high fiscal burdens, while evaders always find a way out.

In such a climate—where patronage prevails and laws are enforced selectively—change cannot come from new fiscal policies alone. It requires a fundamental transformation of the administration: where appointments are merit-based, inspections are frequent and fair, and the law is not a tool for favoritism but a guarantee of equality and sustainable economic development.

4. Responsibility of Fiscal and Economic Policies

Fiscal policies have a direct impact on employers’ decisions to formalize or conceal their employees’ wages. In many cases, the taxation system on labor—along with social security contributions and other fiscal obligations—creates a situation where, for businesses, especially small and medium-sized ones, full wage formalization is perceived as an unaffordable financial burden. This dynamic favors the choice to keep a portion of wages off the official books, negatively affecting state revenues and the social protection of workers.

One of the main reasons businesses avoid fully reporting wages is the high level of taxes and contributions on employment. These fiscal obligations include those mentioned above. When these elements are combined, businesses—particularly those with low profit margins—perceive formalization as a factor that harms their competitiveness. They argue that to survive in a harsh market environment, where many competitors engage in informal practices, they are forced to do the same in order not to fall behind.

Governments often justify high labor taxes by citing the need to fund social protection schemes and public services. However, the main issue is that these policies are not accompanied by sufficient incentives to encourage businesses to report actual wages. In the absence of tax reliefs, employment subsidies, or reduced contribution schemes for small businesses, employers see no direct benefit in fully formalizing their workforce.

In many countries, policies have been implemented to ease this burden by:

• Temporarily reducing social security contributions for small businesses.
• Offering tax reductions to companies that declare employees’ actual wages.
• Implementing subsidy schemes for the formal employment of young or long-term unemployed workers.

Without these mechanisms, businesses view informality as a simpler and less costly way to maintain liquidity and survive.

Another factor influencing employers’ decisions not to declare real wages is the widespread presence of the informal economy. When a large part of the market operates without complying with tax and social obligations, companies that follow the rules face an unfair competitive disadvantage.

If a company fully declares wages and pays all taxes and contributions, it incurs higher costs than a competitor operating informally. This places it at a clear market disadvantage, making it difficult to survive without resorting to the same practice.

5. Responsibility of social and cultural structures

Informal work in Albania is not merely an economic or legal problem, but a phenomenon deeply rooted in the country’s culture and social structure. For decades, such practices have become the norm, creating an environment where informality is widely accepted by society and is not seen as a deviation from the rules, but rather as a common way to survive economically.

One of the key factors sustaining informality is the broad social acceptance of informal practices. In many cases, individuals do not view receiving an “under-the-table” wage or not declaring full income as an ethical or legal issue. This mindset has been shaped by several historical and economic factors:

• The legacy of a centralized economy and a difficult transition, where informality became a survival mechanism for many families.
• Lack of trust in institutions, leading many individuals not to consider pensions or health insurance as a priority.
• A short-term profit mentality, where earning higher income now is more important than future financial security.

This culture of accepting informality is not merely an individual choice but a mechanism built upon the perception that the state fails to provide a reliable social protection system, pushing people to seek alternative—often informal—solutions.

Another important aspect is the lack of financial education and awareness about the long-term consequences of informality.

• Many individuals do not understand that undeclared wages harm their pension rights and access to other social benefits.
• Employees often see cash-in-hand wages as an immediate advantage, without realizing that this results in lower contributions to social security, leading to insufficient pensions in the future.
• Public healthcare, directly linked to social insurance, remains weak for those who do not contribute regularly.

As a result, the lack of a culture of tax and social awareness perpetuates informal practices and makes state intervention to change this reality more difficult.

In Albania, many individuals see informality as a practical solution to cope with high living costs and the low level of declared wages. Due to:

• High social contributions and wage taxes,
• Relatively low wages in the formal sector,
• High living costs,

many workers prefer to receive a higher net wage, even if it means losing long-term benefits.

This situation creates a vicious cycle:

• Workers accept informal wages to earn more in the short term.
• This leads to lower state revenue collection.
• The state fails to provide quality services to citizens.
• Trust in the social protection system continues to erode, further strengthening the trend toward informality.

To address this issue, measures must go beyond stricter controls or penalties for employers and employees engaged in informal practices. These measures must be accompanied by awareness and incentives for formalization.

6. Responsibility of the education system and poor awareness

One of the main reasons individuals accept informal wages and avoid declaring full earnings is the lack of education and awareness about the consequences of tax evasion and the benefits of wage formalization. Many individuals, especially those working in certain sectors, are often unaware of the importance of fully registering wages to secure their long-term rights and benefits. This lack of information about the consequences of tax evasion makes it easier for them to accept such a system, viewing it as a more advantageous short-term opportunity without understanding the long-term damage it may cause.

One reason for this lack of information is closely tied to the low level of financial education in many parts of society. The absence of proper education regarding the consequences of tax evasion and the benefits of wage registration has a direct impact on individual behavior. Many workers may be unprepared to understand that not formalizing their wages will result in major future consequences, such as the loss of pension contributions or lack of support in case of illness.

Moreover, the lack of adequate information about tax policies and social insurance systems leads many individuals to have a distorted perception of the consequences of tax evasion. They may believe that avoiding taxes is an easy way to earn more money in the present, but they are unaware of the long-term impacts this practice can have on their financial and health security.

This situation requires immediate intervention and a mass information campaign to raise awareness among workers and employers about the long-term consequences of informality. Only through comprehensive information and proper education can a society be created that understands the importance of social security benefits and, ultimately, contributes to reducing informality and strengthening the tax system.

7. Responsibility of the informal economy and corruption

The informal economy and corruption—present at several levels of public administration and in the private sector—are two factors that contribute to the strengthening of informality and increase the difficulty of effectively implementing tax laws. When a large portion of the economy operates outside the formal system, this negatively affects the entire process of tax collection and income monitoring.

One of the main reasons corruption facilitates informality is the impunity and lack of accountability of individuals and institutions involved in corrupt activities. Corruption can create an environment where personal gains are prioritized over public interests. When public officials are involved in corruption, they often enable businesses and individuals to circumvent rules and underreport income to pay fewer taxes. Tax oversight and inspections become weaker and less regular. As officials may encourage tax evasion or turn a blind eye to violations, this leads to a high level of informality and a reduction in fiscal revenue collection.

When a large part of the economy operates outside the formal system, authorities face several challenges in enforcing tax laws and collecting fiscal revenue. The informal economy includes a wide range of unreported activities that often use methods to avoid tax obligations. This creates an unfair situation, where businesses operating in the formal market are forced to pay higher taxes to cover the losses caused by informality. Even though real-time data is collected, the activities conducted in the informal sector often involve cash payments or unclear transactions, making them harder to monitor by tax authorities.