The scope of underreporting is the same according to other studies, but the new research primarily demonstrates the dynamics of underreporting, Oja told BNS. "Underreporting has increased," he said. "There are several factors behind it. It grew during the economic crisis as well as in the last few years."

Recent years' increase in underreporting can be attributed to the launch of the employment register, which meant that black economy shifted into the gray zone, Oja said. Another factor is tax evasion via incorporation, which means payment of the owner's income instead of wages. As this is largely legal and legislators are not taking steps to change this, people are increasingly resorting to this method as it is financially more advantageous.

Underreporting is most widespread in business sectors that have always had a high degree of shadow economy, such as construction, Oja explained, adding that it is common in the service sector as well.

According to the economist, several empirical indicators suggest that the underreporting of wages is a problem in Estonia. For example, Estonian companies' investments are larger than those of their Latvian and Lithuanian counterparts, however economic growth is lower. It could be that Estonian businesses reflect the consumption of household durables as investment, Oja offered.

In his opinion, in order to solve this problem, laws should be updated so as to make clear what proper conduct as prescribed by legislators is. "If we have laws which enable some companies in the same branch to pay fewer taxes, it's not fair competition," noted the doctoral student. "Labor costs are higher for companies that pay taxes honestly and it is more difficult for them to operate."

In addition, he continued, part of the workforce could move to sectors where utilizing tax advantages offered by the gray zone is part of the business plan. "At the same time, if these people worked for a large company, they could offer larger value addded," he observed. "In other words, the economy could be faced with a situation where resources are shifting into sectors with relatively low value added."

€700 million in wages underreported

As it is based on people's incomes and conducted on the basis of registers, the new government's social policy could become a problem as well. "As register data is inaccurate [due to the underreporting of wages], this policy is going to be extremely ineffective," Oja warned.

Oja's study was in effect based on a comparison of the wages paid by small and large businesses, taking productiveness into account. From the fourth quarter of 2015 through the third quarter of 2016, the wages of small companies represented 19percent of the business sector's total wages, while their profits made up for 49 percent of the overall profit.

According to the study, over the last year, wageswere underreported for an average of 65,000 employees, adjusted for full-time equivalents. Oja said that the actual number was likely much higher the wages of part-time workers are underreported as well.

The underreported sum amounts to approximately €700 million annually, which Oja said could mean a tax loss of at least 170 million euros for the state budget. If this money were collected, the social tax rate could be lowered by 2.1 percent, he said.

Oja works as an economist at the Bank of Estonia, the country's central bank. He presented his study at the annual conference of the Estonian Economic Association on Friday.