Location: Latvia

VoxEU column: Minimum Wage Policy and Labour Tax Evasion

Read a VoxEU column by Nicolas Gavoille and Anna Zasova: ‘Minimum Wage Policy and Labour Tax Evasion.’ Their analysis shows that increasing the minimum wage has a positive effect on tax rules enforcement. However, this comes at the cost of negatively affecting employment in tax-compliant firms exposed to the minimum wage hike.

The column is based on an article forthcoming in the Journal of Public Economics, written under the EEA-Norway grant project No S-BMT-21-8 (LT08-2- LMT-K-01-073). Access the full paper via this link:  What we pay in the shadows: Labor tax evasion, minimum wage hike and employment

Pētījums atklāj minimālās algas paaugstināšanas ietekmi uz aplokšņu algām un nodarbinātību uzņēmumos, kas ievēro nodokļu noteikumus

Nesen Ir.lv publicētajā rakstā Nicolas Gavoille un Anna Zasova analizē minimālās algas paaugstināšanas sekas Latvijā. Viens no galvenajiem secinājumiem viņu darbā ir tas, ka minimālās algas paaugstināšana ne tikai samazina aplokšņu algas, bet arī samazina nodarbinātības līmeni uzņēmumos, kas ievēro nodokļu maksāšanas noteikumus.

Gavoille un Zasovas raksta pamatā ir pētījums, kas veikts EEZ un Norvēģijas granta finansētā projekta Nr. S-BMT-21-8 (LT08-2- LMT-K-01-073) ietvaros. Ar pilnu pētījuma tekstu var iepazīties šeit: What we pay in the shadows: Labor tax evasion, minimum wage hike and employment


BICEPS/SSE Riga Research Seminar: Understanding How Job Retention Schemes Reshape the Skill Profile of Labor within Firms

We are happy to invite you to a BICEPS/SSE Riga research seminar, which will take place on Thursday, September 14, at 17:00 at SSE Riga, room 611.

We are delighted to welcome Konstantins Benkovskis (Bank of Latvia and SSE Riga) as the speaker. Konstantins is an advisor to the Monetary Policy Department at the Bank of Latvia and an Associate Professor at SSE Riga. His main research interests include international trade, non-price competitiveness, global value chains, productivity, and resource allocation. Konstantins is a Board Member of the Baltic Economic Association and a member of the Editorial Board of the Baltic Journal of Economics.

Title: Understanding How Job Retention Schemes Reshape the Skill Profile of Labor within Firms (co-authored with Olegs Tkacevs and Karlis Vilerts, Bank of Latvia)

Time: Thursday, September 14, 17:00

Venue: SSE Riga, room 611



Utilizing employer-employee data from Latvia, this paper examines the repercussions of participation in job retention programs on the skill composition of the workforce at the firm level. The findings of this study reveal that participation in job retention schemes yields a favorable impact on employees’ probability of retaining their employment within the same firm after the program concludes. The magnitude of this effect is independent of the skills acquired by employees who receive the benefits. However, employees with higher skills are less likely to participate in the job retention scheme due to legal restrictions on the maximum benefit amount and income replacement rate. Taken together, the findings of this investigation suggest that job retention schemes may have an adverse effect on the quality of workforce at the firm level.

BICEPS participates in the international ERA-NET project “City Tolls That Work” (2023-2025)

BICEPS, in cooperation with partners from Vienna University of Economics and Business, IT-company Dolphin Technologies (Austria) and Swedish National Road and Transport Research Institute, has successfully applied for the ERA-NET Cofund Urban Accessibility and Connectivity (ENUAC) third call titled “Innovations for Managing Sustainable Urban Accessibility”. The funding agencies from participating countries agreed to support our proposed research project “City Tolls That Works”. The respective local funding agency for this grant is the Latvian Council of Science.

The project aims to identify ways to improve public attitude toward road congestion tolls in cities. Most economists recognize city tolls as an effective policy measure to fight traffic jams and decrease the negative environmental impacts of car traffic in cities. However, unlike paid car parking, a transport policy measure that is present in almost every urban area in Europe, city tolls tend to face strong public backlash. Singapore, London, Milan, Stockholm and Gothenburg are noticeable exceptions of cities with working road congestion pricing. Public acceptability of the pricing mechanism is low mainly due to concerns that tolls lack fairness, affecting some population groups more negatively than others. Such public resistance makes the idea of city tolls de facto non-operational – there was no progress in the introduction of road congestion tolls in European cities over the past decade. This motivates our search for road tolling schemes that can really work in cities, i.e., that make cities more accessible and sustainable, while also being perceived as fair and having broad public support.

To succeed, one first needs to gain a solid understanding of what population groups actually benefit and lose under existing city tolls and why. Project’s Swedish partner will use unique real-world congestion pricing and registry data of the full Swedish population to acquire new insights on long-term distributional effects of city tolls. These will inform our project further, as BICEPS will propose and measure public support in Riga and Vienna (together with the Austrian partners) for innovative road-pricing schemes, including one with a cash-back component, in which collected tolls are returned directly back to drivers in the form of public transport tokens. BICEPS will then support Austrian partners that will design and implement a field experiment in Vienna that measures behavioral reactions to such novel pricing instruments.

The research consortium is led by Vienna University of Economics and Business. The project period runs from April 2023 until October 2025. Sergejs Gubins is BICEPS senior researcher associated with the project.

Publication in the International Migration journal

Congratulations to Zane Vārpiņa, Marija Krūmiņa, Kata Fredheim, and Anders Paalzow on the publication of their article “Back for business: The link between foreign experience and entrepreneurship in Latvia” in the International Migration journal!

Link to publication (open access)


Research shows that return migrants have a higher propensity to set up an entrepreneurial activity or be self-employed compared to non-migrants. We take a multidisciplinary approach and empirically study the case of Latvia as a migration donor country to learn how re-migrants participate in entrepreneurship back at home. We are interested if return migrants can be seen as a vehicle for entrepreneurship development and if it is worth looking at them as agents of business growth and innovation. Not only we measure the fact of being entrepreneurial but also explore sources that contribute to the higher propensity, attitudes to creating own business venture, level of ambitions and population sentiment towards entrepreneurs. Based on a nationally representative adult population survey of 8000 observations, we find that early-stage entrepreneurial activity, established business ownership as well as intrapreneurship for return migrants exceed that of the non-migrant population. The self-perceived capabilities to start business is higher for those who have lived abroad, and fear of failure is lower. Return migrants also have better business networks and higher growth and export ambitions. Latvian return migrant entrepreneurship is not necessity driven but rather motivated by opportunities. Migration experience, length of stay aboard and capital accumulated abroad are found to be significant predictors of probability to become entrepreneur when controlled for socioeconomic and personal factors.



BICEPS/SSE Riga Research Seminar: Nudging or Gambling to Save? A Field Experiment on Savings Behaviour

We are happy to invite you to a BICEPS/SSE Riga research seminar, which will take place on Thursday, March 30, at 17:00 at SSE Riga, room 411.

We are delighted to welcome Andris Saulītis as the speaker. Andris is a Senior Researcher at the University of Latvia’s Institute of Philosophy and Sociology. He earned his PhD in sociology from the European University Institute in Florence, Italy. Andris Saulītis’ research centers on household financial behavior and experimental methodology.

Speaker: Andris Saulītis (Institute of Philosophy and Sociology, University of Latvia)

Title: Nudging or Gambling to Save? A Field Experiment on Savings Behaviour (co-authored with Lea Kroeger, Humboldt University of Berlin)

Time: Thursday, March 30, 17:00

Venue: SSE Riga, room 411


This experimental study aims to investigate the effect of nudges and prize-linked savings (PLS) account and examine the external validity of laboratory experiments on savings behaviour. We employ a natural setting in collaboration with a professional survey company operating in Latvia and Estonia. The company recruits respondents on a daily basis to take part in commissioned surveys in return for a payment. While usually the payment to the individuals is done immediately after filling out a survey, the experimental design presented participants with a choice between immediate and delayed consumption of the money earned. The experimental design consisted of three experimental groups. In baseline offer, respondents were given the choice between receiving 10 euros immediately or depositing all or part of the amount in a virtual savings account for six months, with a maximum payout of 12 euros. In the social norm treatment, respondents were informed before the choice question that the survey focuses on household financial behaviour and that previous surveys revealed that the majority of respondents choose to save. The PLS account treatment offered individuals, who allocated all 10 euros to the savings account, to participate in a lottery with the chance to win an additional 5 euros on the top of the interest earned. The experimental results show that both social norm nudge and PLS account treatments tend to increase the number of individuals who decide to save. However, it is much lower than found in the laboratory experiments that have examined the effect of PLS accounts on savings behaviour. Both treatments resulted in approximately similar 8% points increase in the number of individuals who opted for savings. The introduction of the PLS account increased savings by 13%, while the social norm treatment increased it by 24%. At the same time, we identify several suggestive savings patterns that are in line with previous studies. First, individuals who play lotteries are more likely to invest in PLS, while non-lottery players are more responsive to social norms. Second, Estonians tend to save more often than Latvians, a trend that has been found in many empirical studies. Taken together, the results of this field experiment provide a more accurate representation of the true behaviour of individuals when it comes to savings and investment decisions. It also suggests that social norms can be as persuasive as financial incentives to increase the savings level.

New working paper “Keeping the best of two worlds: Linking CGE and microsimulation models for policy analysis” 

Authors: Konstantīns Beņkovskis (Bank of Latvia), Ludmila Fadejeva (Bank of Latvia), Anna Pļuta (BICEPS) and Anna Zasova (BICEPS)


In this paper, we link a CGE model with the tax-benefit microsimulation model EUROMOD for Latvia. The model linkage is done using an iterative top-down bottom-up approach, ensuring the convergence of changes in disposable income, employment and wage in both models. We also incorporate the unreported wage payments in CGE and EUROMOD to account for the substantial labour tax non-compliance in Latvia and improve the modelling of the fiscal sector. Several simulations demonstrate the advantages of the joint CGE-EUROMOD system over the individual macro and microsimulation models. The lack of income distribution aspect and the scarcity of fiscal instruments in CGE can be overcome by the features of EUROMOD. The CGE model, on the other hand, provides macroeconomic spillovers that are missing in the simulations of EUROMOD.

Keywords: EUROMOD, CGE model, model linkage, informal sector
JEL codes: C68, D58, D90, J46

Link to publication


Personality Traits, Remote Work and Productivity

The Covid-19 pandemic generated a massive and sudden shift towards teleworking. Survey evidence suggests that remote work will stick in the post-pandemic period. The effects of remote work on workers’ productivity are however not well understood, some workers gaining in productivity whereas others experience the opposite. How can this large heterogeneity in workers productivity following the switch to teleworking be explained? In this brief, we discuss the importance of personality traits. We document strong links between personality, productivity, and willingness to work from home in the post-pandemic period. Our results suggest that a one-size-fits-all policy regarding remote work is unlikely to maximize firms’ productivity.


The Covid-19 pandemic triggered a large and sudden exogenous shift towards working from home (WFH). Within a few months in Spring 2020, the share of remote workers increased from 8.2 percent to 35.2 percent in the US (Bick et al., 2020), and from 5 percent to more than 30 percent in the EU (Sostero et al., 2020). Surveys of business leaders suggest that WFH will stick in the post-pandemic period (e.g., Bartik et al., 2020).

The prevalence of teleworking will ultimately depend on its impact on workers’ productivity and well-being. This impact however remains ambiguous, some studies reporting an overall positive impact, some studies a negative one. Overall, the balance of these pros and cons can vary greatly across individuals. The existing literature emphasizes the importance of gender and occupation for workers’ productivity under WFH arrangements, but a large share of this heterogeneity remains unexplained.

In a recent paper (Gavoille and Hazans, 2022) we investigate the link between personality traits and workers’ productivity when working from home. Importance of non-cognitive skills, in particular personality traits, for individual labor market outcomes is well documented in the literature (e.g., Heckman et al., 2006; Heckman and Kautz, 2012). In the context of WFH, soft skills such as conscientiousness or emotional stability, are good candidates for explaining heterogeneity in relative productivity at the individual employee level.

The Latvian context provides an ideal setup for studying the effect of teleworking on productivity. First, Latvia has a large but unexploited potential for teleworking. Dingel and Neiman (2021) estimate that 35 percent of Latvian jobs could be done remotely, which is about the EU average. However, prior to the pandemic only 3 percent of the workforce was working remotely – one of the smallest figures in the EU. Second, the Latvian government declared a state of emergency in March 2020, which introduced compulsory WFH for all private and public sector employees, except for cases where on-site work is indispensable due to the nature of the work. This led to a six-fold increase in the share of remote workers within a couple of months. This stringent policy constitutes a massive exogenous shock in the worker-level adoption of WFH, well suited for studying.

Survey Design

To study the link between personality traits, teleworking, and productivity, we designed an original survey, implemented in May and June 2021 in Latvia. The target population was the set of employees who experienced work from home (only or mostly) during the pandemic. To reach this population, we used various channels: national news portals, social media (Facebook and Twitter) and radio advertisement. More than 2000 respondents participated in the survey, from which we obtained more than 1700 fully completed questionnaires.

Productivity and Remote Work

In addition to the standard individual characteristics such as age and the likes, we first collect information about respondents’ perception of their own relative productivity at the office and at home. More specifically, we ask “Where are you more productive?”. The five possible answers are “In office”, “In office (slightly)”, “No difference”, “At home (slightly)” and “At home” (plus a sixth answer: “Difficult to tell”). Table 1 provides a description of the answers. Roughly one third of the respondents reports a higher productivity at home, another third a higher productivity at the office, and one third do not report much of a difference. This measure of productivity is self-assessed, as it is the case with virtually any “Covid-19-era” paper on productivity. Note however that our question is not about absolute productivity as such, but relative productivity of teleworking in comparison with productivity at the office, which is arguably easier to self-assess.

Second, we ask “Talking about the job you worked at mostly remotely, and taking into account all difficulties and advantages, what would you choose post-pandemic: working from home or in office for the same remuneration (if you had the choice)?” The five possible answers are “Only from home”, “Mostly from home”, “Indifferent”, “Mostly in office”, “Only in office” (and a sixth option: “Difficult to tell”). The main aim of this question is to study who would like to keep working remotely in the post-pandemic period, irrespective of productivity concerns. Notably, the answers are much different than from the productivity question (see Table 1), which suggests the latter does not reflect preferences.

Finally, we ask respondents about the post-pandemic monthly wage premium required by the respondent to accept i) working at the office for individuals preferring to work from home; ii) working from home for individuals preferring to work at the office. Median values of these premia for workers with different preferences are reported in Table 1 (panel C). These values appear to be economically meaningful both in absolute terms and relative to the median net monthly wage in Latvia (which was 740 euro in 2021), reinforcing the reliability of the survey.

Table 1. Outcome variables

Source: reproduced from Gavoille and Hazans (2022).

Measuring Personality Traits

The survey contains a section aiming at evaluating the personality of the respondent through the lens of the so-called Five Factor Model of Personality. The psychometrics literature offers several standardized questionnaires allowing to build a measure for each of these five factors – Openness to Experience, Agreeableness, Extraversion, Emotional Stability and Conscientiousness. We rely on the Ten-Item-Personality-Inventory (TIPI) measure (Gosling et al., 2003). This test is composed by only ten questions, making it convenient for surveys, and it has been widely used, including in economics. As simple as this approach seems, the performance of this test has been shown to be only slightly below those with more sophisticated questionnaires, and to provide measures highly correlated with the existing alternative measures of personality traits.


Overall, the results indicate that personality traits do matter for productivity at home vs. at the office. The personality trait most strongly related to all three outcome variables is Conscientiousness. Controlling for a battery of other factors, individuals with a higher level of conscientiousness are reporting a higher productivity when working from home as well as a higher willingness to keep working from home after the pandemic. This link is not only statistically significant but also economically meaningful: an individual with a level of conscientiousness in the 75th percentile is 8.4 percentage points more likely to report a higher productivity from home than a similar individual in the 25th percentile. Considering that the sample average is 31 percent, this difference is substantial.

Previous studies documented a positive correlation between Conscientiousness and key labor market outcomes such as wage, employment status and supervisor evaluation. A usual concern of employers is a possible negative selection of workers in teleworking. Observing that highly conscientious workers are more willing to work from home, where they are more productive, suggests that firms do not need to exert a very strict control on employees choosing to telework.

Openness to Experience shows a similar positive relationship with productivity. Extraversion on the other hand is only weakly negatively related to productivity. The relationship between this trait and willingness to work from home is however much stronger. These findings are intuitive: workers with a high Openness to Experience are more likely to cope easily with the important changes associated with switching to WFH. On the other hand, extravert individuals may find it more difficult to remain physically isolated from colleagues.

The literature studying the relationship between WFH and productivity suggests a conditional effect based on gender. In parallel, the literature investigating the role of personality traits on labor market outcomes also documents gender-specific patterns. As our work builds on these two strands of literature, we provide a heterogeneity analysis of the personality traits/productivity relationship conditional on gender.

When disaggregating the analysis by gender, it appears that the relationship between personality traits and productivity is stronger for women than for men. Conscientiousness and (to a smaller extent) Openness to Experience have a strong positive relationship with relative productivity of teleworking for women, while Extraversion and Agreeableness feature economically meaningful negative relationships. Noteworthy, the effects of Agreeableness and Openness to Experience do not concern the probability to be more productive at the office but only the willingness to work from home after the pandemic. For men, only Conscientiousness is significant, with a much smaller magnitude than for women.


We document that personality traits matter for changes in productivity when switching to a WFH regime. In particular, individuals with high levels of Conscientiousness are much more likely to report a better productivity from home than from the office. Additionally, Openness to Experience and Extraversion also do play a role.

Taken together, these results suggest that a one-size-fits-all policy is unlikely to maximize neither firms’ productivity nor workers’ satisfaction. It also highlights that when estimating firm-level ability in switching to remote work, characteristics of individual workers should be considered. In particular, employers practicing remote work should invest in socialization measures to compensate the negative effect of teleworking on the wellbeing of more extravert workers. Finally, several surveys (e.g., Barrero et al., 2021) document that more than a third of workers in the US would start looking for a new job allowing (some) work from home if their current employer would impose a strict in-office policy. Our results support this finding but also indicate that the opposite also holds: some workers would strongly oppose to remaining in a WFH setup after the pandemic. Personality traits are important determinants of the value attached to working from home.


Foreign-Owned Firms and Labor Tax Evasion in Latvia

It is well-documented that foreign-owned firms often pay higher wages than domestic firms. This phenomenon is usually explained by foreign firms being more productive. In this brief, we discuss another mechanism that drives the wage premium for employees of foreign-owned firms. By comparing income and expenditures of households led by employees of foreign-owned firms, domestic firms and public enterprises in Latvia, we show that employees of foreign-owned firms receive less undeclared cash payments than employees of domestic firms.


A vast economic literature documents a wage premium for employees of foreign-owned firms (e.g., Heyman et al., 2007; Hijzen et al., 2013). This can result from self-selection of foreign firms in highly productive sectors (Guadalupe et al., 2012) or from a productivity increase (Harding and Javorcik, 2012). In a recent paper (Gavoille and Zasova, 2021), we provide evidence of a third driver: foreign-owned firms are more (labor) tax compliant than domestic firms.

Envelope wage, i.e., an unreported cash-in-hand complement to the official wage, is a widespread phenomenon in transition and post-transition countries (e.g., Gorodnichenko et al., 2009 in Russia, Putninš and Sauka, 2015 in the Baltic States, Tonin, 2011 in Hungary). Employees are officially registered, but the income reported to tax authorities is only a fraction of the true income, the difference being paid in cash. If domestic firms are more likely to underreport wages than foreign-owned ones, the documented wage premium for employees of foreign-owned firms is overestimated.

Methodology and data

To compare the prevalence of income underreporting in foreign and domestic firms, we use an approach similar to Pissarides and Weber (1989). This approach is based on two main assumptions. First, even though households participating in an expenditure survey can have incentives to misreport their expenditures, they accurately report their expenditure on food.

The second assumption is that if all households would fully report their income, similar households would report a similar share of spending on food. If, however, a group of households is likely to underreport income, their fraction of income spent on food will systematically be higher than that of tax-compliant households. Using the propensity to food consumption of a group of households that cannot evade payroll tax as a benchmark, we can identify groups of tax-evading households by comparing their food consumption with the reference group.

In this brief, we mainly focus on three household groups: households where the head is an (1) employee of a foreign-owned firm (reference group), (2) employee of a public sector enterprise, and (3) employee of a domestic firm. We introduce public sector employees as an additional comparison group, since they cannot collude with employers to underreport wages. Hence, our approach allows us to test whether households in the third group are more likely to receive undeclared payment than households in the first group, and additionally test if our reference group is systematically different from public sector employees.

We estimate Engel curve-type relationships for food consumption for different types of households, i.e., we estimate how households’ food consumption varies with income depending on employment of the main breadwinner (employed in a foreign-owned firm, public sector enterprise, domestic firm or self-employed), controlling for various household characteristics (number of adults, size of household, place of residence, level of education of the main breadwinner, and other).

Our data comes from three sources. First, we use the 2020 round of the Latvian Household Budget Survey (HBS), which provides information on household consumption, income and characteristics in 2019. Second, we use an administrative matched employer-employee dataset providing information on reported wages for the whole population of employees in Latvia. We match the second database with HBS using (anonymized) individual IDs contained in both datasets. Finally, we use (anonymized) firm IDs contained in the second database to merge it with a third data source, which provides detailed information on firms’ foreign-ownership status.


For simplicity, in the rest of the brief we denote “household where the head is an employee of a foreign-owned firm” as simply “foreign-owned households”. A similar simplification applies to other household groups.

Comparing domestic and foreign-owned households, domestic households spend a higher share of their income on food. Figure 1 plots a non-parametric Engel curve for the two groups. The two curves exhibit fairly similar behavior, but the Engel curve for domestic households always lies above the one for foreign-owned households: for a given income, domestic households always spend a larger fraction on food than foreign-owned ones.

Our model estimations provide two main results. First, we find that the net wage premium for employees of foreign firms is 13-35%, depending on the sample and the source of data on income. Second, we show that domestic households are more likely to underreport income than foreign-owned households. On average, domestic firm households are estimated to conceal 26% more income than foreign-owned ones. At the same time, public sector households do not exhibit a significantly different food consumption pattern than foreign-owned firm households. Assuming that public sector households cannot evade, foreign-owned firm households hence do not underreport. The estimated share of concealed income is even larger (about 40%) if we restrict our sample to households where the head is aged below 50 years and is full-time employed.

Figure 1. Engel curve

Source: authors’ calculations. Note: We follow Hurst et al. (2014). We regress (administrative) wage and food consumption separately on demographic controls to condition out these factors. We recenter the residuals at the unconditional averages for each group and use these residuals to estimate the Engel curve with a cubic spline.


In a context of widespread labor tax evasion, the observed wage premium for employees of foreign-owned firms can be driven by payroll tax compliance. How much of the wage premium can underreporting explain? Our results for Latvia suggest a net wage premium of 13% to 35% for the group of foreign-owned households. This roughly corresponds to the magnitude of the underreporting factor, indicating that nearly all of the wage premium can be explained by labor tax evasion. Even though the precise underreporting point estimates should be cautiously interpreted, and this 1-to-1 relation is anecdotal, this nevertheless highlights the potential importance of envelope wages in explaining the wage premium of employees of foreign-owned firms when labor tax evasion is prevalent.

Acknowledgement: This brief is based on a recent article published in Economics Letters (Gavoille and Zasova, 2021). The authors gratefully acknowledge funding from LZP FLPP research grant No.LZP-2018/2-0067 InTEL (Institutions and Tax Enforcement in Latvia).