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Police organize a line of refugees on a stairway leading up to trains arriving from Denmark at the Hyllie train station outside Malmo, Sweden, November 19, 2015. REUTERS/Johan Nilsson/TT News Agency/File Photo

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By Niklas Pollard and Johan Ahlander

STOCKHOLM (Reuters) - Swedes rarely use cash, but building firm owner Piotr can’t get enough of the stuff. Every week, he spends hours racing from ATM to ATM using four credit cards to withdraw up to 80,000 Swedish crowns (£7,241.91). He needs the cash, he says, to pay the undocumented immigrant workers he employs.

"They come here with just a suitcase and need to provide for their families from day one," said Piotr, who declined to have his full name published because some of his cash-only payments are illegal. "By the time the system has processed them they would already be broke. I can give them a job straight away when no one else cares."

Piotr has an ever larger pool to choose from. A record 163,000 asylum seekers arrived in Sweden in 2015, along with thousands of migrant workers mainly from eastern Europe who were attracted to one of the fastest growing economies in Europe.

But while the cheap labour may be good for Piotr, government officials and economists worry the shadow economy has begun to undercut Sweden’s economic model, whose generous welfare provisions and high wages are built on high rates of productivity and one of the world's heaviest tax burdens.

Unions and tax officials say illegal workers have begun to push down average pay and deprive state coffers of income tax. Companies that do things by the book are struggling to compete, further depleting the tax take.

Sweden’s tax authority estimates undocumented workers cost the country at least 66 billion crowns ($7.80 billion) in lost taxes in 2015. That’s around 4 percent of public sector tax revenues.

Worried that it was struggling to integrate newcomers, Sweden introduced border controls earlier this year. It has a backlog of asylum applications which means around a two-year wait for a decision. In that time, adults receive around $8 each a day, to cover all their costs except housing.

Some find work on the side, and some who are rejected drop into the shadow economy. The Migration Agency estimates up to 10,000 asylum seekers per year will choose to disappear from their radar rather than being deported. Around 30,000 to 50,000 undocumented immigrants already work in industries like construction, hotels, transport and restaurants, it estimates.

Politicians say Sweden has to figure out a better way to assimilate newcomers or risk fuelling social inequality like that which exploded in 2013 with riots in Stockholm's immigrant suburbs.

Some economists and centre-right political parties argue the government should lower entry-level salaries for immigrants and bring them into the official system. 

"I see a danger that if we don't seek to solve this in a regulated manner, reality will come knocking all the same," said Lars Calmfors, economist and head of the Swedish Labour Policy Council, a think-tank funded by Sweden's main business lobby.

But leftist politicians and unions say the solution is education. Sweden has around 350,000 unemployed but its economy is booming and 100,000 jobs remain unfilled because applicants lack the right qualifications.

So far, the governing coalition of Social Democratic and Greens has opted to fast-track skilled asylum seekers, recognise foreign degrees more quickly, and start to send home migrants who arrive illegally.

"There is a significant risk more people will enter the shadow economy and it is very, very serious," said Ylva Johansson, Social Democrat labour market minister. "This is why it is important that we intensify efforts to send home those who cannot stay here, preferably voluntarily, but if necessary by force."

“DARK FORCES”

Piotr's small building firm on the outskirts of Stockholm employs four crews of four workers doing renovation and small house construction. None of his workers pay all their taxes and many are undocumented.

Turnover of staff is rapid, but with "people asking about work every week," Piotr said he never struggles to find new workers.

"I can take jobs where the client wants to do it 'black' and I can price myself so low that I win job offers. If I didn't do some of it under the table we would go under and 16 people would be out of a job," he said.

Peter Lofgren, development head at the Swedish Construction Federation, a trade body with more than 3,100 member companies, said firms that do everything by the book are struggling.

"It is colossally difficult to compete properly with a company that is determined to neither pay taxes or fees," he said. "The rogue companies are not stupid. They put themselves low, but not so low as to arouse too much suspicion. It also means that their margins are incredible ... These dark forces are incredibly innovative."

Some companies argue that cheap labour is vital for their prosperity and also the best way to counter the shadow economy. Prime Minister Stefan Lofven's coalition halved the maximum tax break on home services such as cleaning last year, and many firms suffered.

"To take these steps in the situation we have today is just incredibly unfortunate," said Maria Andersson, CEO of Hemfrid, a cleaning company that employs more than 2,000 people, 85 percent of whom were born outside Sweden.

THE WORKERS

According to government statistics, only around 60 percent of immigrants have formal jobs after seven years in the country. Given that, it’s not surprising that many turn to the shadow economy.

As more do, though, average pay falls.

The Trade Union Centre for Undocumented Migrant Workers helps undocumented workers who are owed money by employers or injured at work. Director Sten-Erik Johansson said some full-time workers now make just 6,000-7,000 crowns ($700-800) a month. That’s about one-fifth of the average formal pre-tax salary, and just over half the money undocumented workers made a few years ago.

"It is a massive decline," said Johansson. "We're creating a whole new underclass. And it will be totally on the margins of society with no right to pensions, maternity leave or anything."

One such worker is Mado, a 28-year-old illegal immigrant from Egypt who struggled to find a good job there after the 2011 revolution.

Mado did not even bother applying for asylum after arriving in Sweden on a tourist visa in the summer of 2014. There is no war in Egypt and very little grounds on which to claim his life was endangered.

Once in Sweden, he stayed with three other undocumented migrants in a cramped apartment in one of Stockholm's largely immigrant suburbs.

Eventually, he got a job making deliveries and assembling furniture at a small workshop, working seven days a week to earn 9,000 Swedish crowns ($1,100) per month.

"It was a tough job," said Mado, who declined to be identified by his family name for fear of upsetting his ailing mother in Egypt. "But it was OK, I was just happy to have a job."

But a year in, Mado cut off his finger on a saw. His boss fired him without compensation and left him with a medical bill and no means to pay it.

Luckily, friends took care of him, and in 2015 he married a Swede. He now has a formal job at Hemfrid, the cleaning company, including 18 months paid parental leave and job security just like Swedes.

"It's a good start," he says smiling over a coffee. "I have insurance, I get paid for overtime and I even get vacation."

(Edited by Simon Robinson and Sara Ledwith)

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