The shadow economy includes the production of goods and services "hidden" intentionally for any of the following reasons:

a) to avoid paying income tax, value added tax and other taxes;

b) to avoid paying contributions to the health system, the social security system etc;

c) to avoid compliance with certain legal labour market standards, such as the mandatory minimum wage per economy, the maximum number of working hours, labour security standards;

d) to avoid compliance with certain administrative procedures, including statistical questionnaires or other administrative forms.

The European Commission defines the shadow economy as being “those economic activities and the income derived from them that circumvent or avoid government regulations or taxation

The Shadow Economy as % of GDP (2016)

Source: Friedrich Schneider

  1. Bulgaria: 30.2
  2. Romania: 27.6
  3. Croatia: 27.1
  4. Estonia: 25.4
  5. Lithuania: 24.9
  6. Cyprus: 24.2
  7. Malta: 24.0
  8. Slovenia: 23.1
  9. Poland: 23.0
  10. Latvia: 22.9
  11. Hungary: 22.2
  12. Greece: 22.0
  13. Italy: 20.2
  14. Spain: 17.9
  15. Portugal: 17.2
  16. Belgium: 16.1
  17. Czech Rep: 14.9
  18. Slovakia: 13.7
  19. Sweden: 12.6
  20. France: 12.6
  21. Finland: 12.0
  22. Denmark: 11.6
  23. Ireland: 10.8
  24. Germany: 10.8
  25. United Kingdom: 9.0
  26. Netherlands: 8.8
  27. Luxembourg: 8.4
  28. Austria: 7.8

The causes and characteristics of the underground economy

The shadow economy may be present in all sectors of the economy, which can generate extremely difficult situations for the general development of the economy itself. The main causes of the underground economy are considered:

  • excessive taxation - tax system has been identified as one of the main factors for the emergence and development of the economy;
  • government regulations for certain types of activities - increase in the intensity of legal regulations, often measured by their number, reduces freedom of action of individuals employed in the formal economy, thus leading to a significant increase in labor cost in the formal economy, costs it is the true incentive to work in the informal economy;
  • weak legal system - as long as it works on the principle of rule of law leaves enough loopholes to get away with specific operating businesses in the economy.
  • fear of losing some welfare benefits provided by the state;
  • much flexibility in the use of labor.

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