I ‘ve been going through various studies on tax evasion in Greece recently (i ‘ll be doing a summary post shortly). Apart from their main focus, the papers have also pointed out a few important characteristics of the periphery countries. One of their main features is the fact that self-employment and small-medium enterprises (SMEs) consist the backbone of the economy in basically all of the periphery countries.

For starters here are the self-employment figures for the periphery and Germany along with employment in the agriculture/fishing sector:

Greece stands out remarkably, with a self-employed share of more than 1/3 along with a large agricultural sector. Portugal and Italy also have figures close to 25% while Spain is at 17% which is actually the EU27 average. Germany stands out with a very small share of less than 12%.

Some people suggest that the large share of self-employed has to do with people effectively being paid salaries but who are presented as contract workers to avoid social contributions (since self-employed professionals social contributions are much lower and are paid by the professional himself). Although that might account for a share of the very large percentage in the case of Greece, i don’t think that it is a satisfactory argument for a large part of it.

The OECD STAN database provides for self-employed figures per economy sector (figures are for 2008):

Contract work (with an aim of avoiding social contributions) should be mainly concentrated in the last two categories. ‘Community, social and personal services’ includes such services as education and healthcare (where self-employment is quite reasonable), narrowing the list further. Summing up, my view is that probably 2-4% of the self-employment share can be accounted by contract workers, dropping the ‘real’ share to at least 31-32%.

The other interesting statistics refer to SMEs:

Greece and Portugal stand out with a very large number of SMEs per 1000 persons with most of them being micro enterprises. The share of total employment is also very large. If one assumes that micro enterprise owners are counted as self-employed, then based on the total micro population, only this ‘head count’ accounts for 16% of total employment in Portugal and Greece.  Germany numbers are almost 4 times lower (regarding the share of SMEs per 1000 persons and micro-SMEs), with a much larger percentage being small and medium enterprises and the total share of employment at 37% compared to 50-57% in the periphery.

The large share of micro-SMEs, self-employment and agriculture in Greece and Portugal is a basis for some interesting macro arguments against internal devaluation. Micro enterprises and self-employed have much lower capacity of coping with a large shock on their turnover and profits (a result of demand destruction and larger taxes on income and costs). Adjusting through wage and work hours cuts is more difficult (because of the small number of workers or even lack of), while companies also face other difficulties like small liquidity buffers and limited access to bank financing. What usually occurs is workers layoffs, company shutdown or a gradual move to the shadow economy sector in order to survive.

It is no coincidence that the most pressing issues for SMEs as outlined in SME surveys are finding customers, access to finance and costs:

The relevant micro data of the latest ECB SME survey for Greece are as follows:

The share of self-employment that could be counted in the tradable sector in Greece is 42.5% (mainly due to the 27% share of agriculture). Still, most of their income is usually attributed to internal demand than exports due to limited customer networks and resources. Human and productive capital does not move or is reused easily (by other companies/sectors) while drops in unit labor costs (through reductions in labor compensation) will mostly result in lower internal demand than translate in higher international competitiveness. This is quite evident in Table 2 of the latest Greek quarterly national accounts where, measuring the GDP using the income method, shows that most of the loss of income is due to reduced compensation of employees, rather than loss in operating surplus/mixed income:

In general, an economy with a large share of self-employment will adjust to lower internal demand mainly through higher unemployment and a move to the shadow sector. Lower wages will mainly add to the drop in aggregate demand without benefiting exports too much (although the drop is reduced by the decrease in imports which usually affect low profit margin sectors first). The problems are increased by other factors which affect companies fixed and variable costs such as:

  • Banking sector problems (evident especially in Greece) which lead to much higher interest rates on new and existing loans.
  • Tax policies which enlarge important enterprise costs such as energy and transport.

Greece and Portugal do need large investment projects and much lower loan financing costs by banks in order to be able to move enough resources to the tradable sector while a large social protection network (focused on the unemployed) is essential. The economy structure in Spain and Italy seems to suggest that ULC reductions might have less negative results (subject to the banking sector capacity to provide cheap loans).

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