Measuring the scale of envelope wages: Evidence from Poland

Abstract

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.