Eliciting permanent and transitory undeclared work from matched administrative and survey data

We study the undeclared work patterns of Hungarian employees in relatively stable jobs, using a panel dataset that matches individual-level self-reported Labour Force Survey data with administrative records of the Pension Directorate for 2001-2006. We estimate the determinants of undeclared work using Heckman-type random-effects panel probit models, and develop a two-regime model to separate permanent and transitory undeclared work, where the latter follows a Markov chain. We find that about 6 to 7 percent of workers went permanently unreported for six consecutive years, and a further 4 percent were transitorily unreported in any given year. The models show lower reporting rates – especially in the permanent segment – among males, high-school graduates, those in agriculture and transport, small firms and various forms of atypical employment. Transitory non-reporting may be partly explained by administrative records missing for technical reasons. The results suggest that 1. the "aggregate labour input method" widely used in Europe can indeed be a simple yet reliable tool to estimate the size of informal employment, although it slightly overestimates the true magnitude of black work, and 2. the long-term pension consequences of undeclared work may be substantial because of the high share of permanent non-reporting.