Research Report

Estimating the Size of the “market-based production of goods and services, wheth- Shadow Economies of Highly- er legal or illegal, that escapes detection in the official developed Countries: estimates of GDP.” One of the broadest definitions in- cludes: “those economic activities and the income de- Selected New Results rived from them that circumvent government regulation, taxation or observation” (Dell’Anno 2003; Dell’Anno and Schneider 2004).

1 Friedrich Schneider This article uses the following, narrower, definition of the shadow economy.3 The shadow economy includes Introduction all market-based legal production of goods and services that are deliberately concealed from public authorities Empirical research into the size and development of the for the following reasons: global shadow economy has grown rapidly (Feld and Schneider 2010; Gerxhani 2003; Schneider 2011, 2015; (1) to avoid payment of taxes, e.g. income taxes or value Schneider and Williams 2013). The goal of this paper added taxes, is to present the latest shadow economy estimates for (2) to avoid payment of social security contributions, 36 highly-developed countries over 2003–2016 and to (3) to avoid certain legal labor market standards, such as discuss their different developments. The article begins minimum wages, maximum working hours, safety with some theoretical considerations, including a defini- standards, etc., and tion of the shadow economy and a brief discussion of its (4) to avoid complying with certain administrative main causes. This is followed by a short description of procedures, such as completing statistical question- the various measurement methods and estimates of the naires or other administrative forms. size of the shadow economies of 36 highly-developed countries over 2003–2016. Finally, the last section offers Theorizing about the shadow economy a summary and some concluding remarks. Individuals are rational calculators who weigh up costs and benefits when considering breaking the law. Their Theoretical considerations decision to partially or completely participate in the shadow economy is a choice overshadowed by uncer- Defining the shadow economy tainty, as it involves a trade-off between gains if their activities are not discovered and losses if they are dis- Researchers attempting to measure the size of the covered and penalized. Shadow economic activities SE shadow economy face the question of how to define thus negatively depend on the probability of detection p it (Schneider 2015; Schneider and Enste 2000, 2002; and potential fines f, and positively on the opportunity Schneider and Williams 2013; Alm, Martinez-Vazquez costs of remaining formal denoted as B. The opportu- and Schneider 2004; Feld and Schneider 2010). One nity costs are positively determined by the burden of commonly used working definition is all currently un- taxation T and high labor costs W – individual income registered economic activities that would contribute to generated in the shadow economy is usually categorized the officially calculated (or observed) Gross National as labor income rather than capital income – due to la- Product if observed.2 Smith (1994, 18) uses the definition bor market regulations. Hence, the higher the tax burden and labor costs, the more incentives individuals have to 1 Johannes Kepler University of Linz. 2 This definition is used, for example, by Feige (1989, 1994) and avoid these costs by working in the shadow economy. Schneider (2011, 2015). Do-it-yourself activities are not included. For estimates of the shadow economy and do-it-yourself activities for 3 Compare also the excellent discussion of the definition of a shadow , see Buehn, Karmann and Schneider (2009). economy in Pedersen (2003) and Kazemier (2006).

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The probability of detection p itself depends on enforce- Methods for estimating the size of the shadow economy ment actions A taken by the tax authority and on facili- tating activities F accomplished by individuals to reduce Estimating the size of a shadow economy is a difficult the detection of shadow economic activities. This dis- and challenging task. This article only outlines various cussion suggests the following structural equation: procedures for estimating the size of a shadow econo- my.6 Three different categories of measurement meth- ! + ! ! + + + ( " % " %+ ods are most widely used, and each is briefly discussed. SE = SE*p$A,F'; f ;B$T,W '- ) # & # &, Direct approaches Hence, shadow economic activities may be defined as those economic activities and income earned that cir- These are microeconomic approaches that either employ cumvent government regulation, taxation or observa- well-designed surveys and samples based on voluntary tion. More narrowly, the shadow economy includes mon- replies, or tax auditing and other compliance methods. etary and non-monetary transactions of a legal nature; Sample surveys designed to estimate the shadow econ- hence all productive economic activities that would gen- omy are widely used.7 The main disadvantages of this erally be taxable were they reported to the state (tax) au- method are the flaws inherent in all surveys. For exam- thorities. Such activities are deliberately concealed from ple, the average precision and results depend heavily on public authorities to avoid payment of income, value the respondent’s willingness to cooperate, it is difficult added or other taxes and social security contributions, to assess the amount of undeclared work from a direct or to avoid compliance with certain legal labor market questionnaire, most interviewees hesitate to confess standards such as minimum wages, maximum working to fraudulent behavior, and responses are of uncertain hours, or safety standards and administrative proce- reliability. dures. The shadow economy thus focuses on productive economic activities that would normally be included in Indirect approaches the national accounts, but which remain underground due to tax or regulatory burdens.4 Although such legal These approaches, which are also called indicator ap- activities would contribute to a country’s value added, proaches, are mostly macroeconomic and use various they are not captured in national accounts because they economic and other indicators that contain informa- are produced in illicit ways. Informal household eco- tion about the development of the shadow economy nomic activities such as do-it-yourself activities and over time. Relating them to the definition of the shad- neighborly help are typically excluded from the analysis ow economy, they provide value added figures. In most of the shadow economy.5 cases, legally-bought material is often included; hence, they provide upper-bound estimates with the danger of What are the most important determinants influencing a double counting problem due to the inclusion of the the shadow economy? Table 1 offers an overview of legally-bought material. Therefore a wide (broad) defi- these factors. nition of the shadow economy is applied; especially as some criminal activities like human trafficking are also included. There are currently five indicators that leave some traces of the shadow economy.8

6 The extensive discussion over the pros and cons of the various meth- ods used to measure/estimate the shadow economy is not documented here due to space reasons; compare, for example, Feld and Schneider (2010), Schneider (2015) and Schneider and Williams (2013). 4 Although classical crime activities such as drug dealing are inde- 7 The direct method of voluntary sample surveys was extensively pendent of increasing taxes and the causal variables included in the used for the first time for by Isachsen, Klovland and Strom empirical models are only imperfectly linked (or causal) to classical (1982), and Isachsen and Strom (1985). For this method is crime activities, the footprints used to indicate shadow economic activ- used by Mogensen et al. (1995) in which they report “estimates” of the ities such as currency in circulation also apply for classic crime. Hence, shadow economy of 2.7% of GDP for 1989, 4.2% of GDP for 1991, 3.0% macroeconomic shadow economy estimates do not typically distin- of GDP for 1993 and 3.1% of GDP for 1994. See also newer studies like guish legal from illegal underground activities; but instead represent Feld and Larsen (2005, 2008, 2009) that estimate similar sizes for the the whole spectrum. shadow economy of Germany. The advantages and disadvantages of 5 From a social perspective, maybe even from an economic one, soft this method are extensively dealt with by Pedersen (2003), Mogensen forms of illicit employment such as moonlighting (e.g. construction (1985) and Mogensen et al. (1995) in their excellent and very carefully work in private homes) and its contribution to aggregate value add- conducted investigations. ed may be assessed positively. For a discussion of these issues, see 8 Due to space constraints, these approaches are merely given a men- Thomas (1992) and Buehn, Karmann and Schneider (2009). tion and not explored in greater detail. Compare Schneider (2015).

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Table 1 The main causes determining the shadow economy

Causal variable Theoretical reasoning References

(1) Tax and social The distortion of the overall tax burden affects labor-leisure E.g. Johnson, Kaufmann and security contribution choices and may stimulate labor supply in the shadow economy. Zoido-Lobatón (1998a,b); Giles burdens The bigger the difference between the total labor cost in the of- (1999a); Tanzi (1999); Schneider ficial economy and after-tax earnings (from work), the greater (2003, 2005, 2015); Dell’Anno the incentive to reduce the tax wedge and work in the shadow (2007); Dell’Anno, Gomez-Antonio economy. This tax wedge depends on social security burden/pay- and Alanon Pardo (2007); Schneider ments and the overall tax burden, making them a key determinant and Williams (2013). in the existence of the shadow economy.

(2) Quality of public The quality of public institutions is another key factor in the de- E.g. Johnson et al. (1998a,b); Fried- institutions velopment of the informal sector. In particular, the efficient and man, Johnson, Kaufmann and Zoi- discretionary application of the tax code and government regu- do-Lobatón (2000); Dreher and lations plays a crucial role in the decision to work underground. Schneider (2009); Dreher, Kotso- A bureaucracy with highly corrupt government officials tends to giannis and McCorriston (2009); be associated with greater unofficial activity, while good rule of Schneider (2010, 2015); Teobaldelli law through secure property rights and contract enforceability (2011); Teobaldelli and Schneider increases the benefits of having a formal status. The likelihood (2013); Schneider and Williams of an informal sector developing thanks to the failure of politi- (2013). cal institutions in promoting an efficient market economy, and entrepreneurs going underground due to inefficient public goods provision, may be reduced if institutions can be strengthened and fiscal policy is more closely aligned with the median voter’s pre- ferences.

(3) Regulations Regulations such as labor market regulations or trade barriers E.g. Johnson, Kaufmann and Shlei- for example, are another important factor that reduces freedom fer (1997); Johnson, Kaufmann and (of choice) for individuals in the official economy. They to Zoido-Lobatón (1998b); Friedman, a substantial increase in labor costs in the official economy and Johnson, Kaufmann and Zoido-Lo- thus provide another incentive to work in the shadow economy: baton (2000); Kucera and Roncolato countries that are more heavily regulated tend to have a higher (2008); Schneider (2011, 2015). share of the shadow economy in total GDP.

(4) Public sector An increase in the shadow economy may lead to lower state re- E.g. Johnson, Kaufmann and Zoi- services venues, which in turn reduce the quality and quantity of pub- do-Lobatón (1998a,b); Feld and licly-provided goods and services. Ultimately, this may raise tax Schneider (2010). rates for firms and individuals, although the quality of the public goods (such as public infrastructure) and of the administration may continue to deteriorate. The result is an even stronger incen- tive for participating in the shadow economy.

(5) Tax morale The efficiency of the public sector also has an indirect effect on E.g. Feld and Frey (2007); Kirch- the size of the shadow economy because it affects tax morale. Tax ler (2007); Torgler and Schneider compliance is driven by a psychological tax contract that entails (2009); Feld and Larsen (2005, rights and obligations on the part of taxpayers and citizens on 2009); Feld and Schneider (2010). the one hand, but also on the part of the state and its tax authori- ties on the other hand. Taxpayers are more inclined to pay their taxes honestly if they receive valuable public services in ex- change. The treatment of taxpayers by the tax authority also plays a role. If taxpayers are treated like partners in a (tax) contract instead of subordinates in a hierarchical relationship, taxpayers will fulfil the obligations of the psychological tax contract more readily. Hence, (better) tax morale and (stronger) social norms may reduce the probability of individuals working underground.

(6) Development of The development of the official economy is another key factor Schneider and Williams (2013); the official economy in the shadow economy. The higher (lower) the unemployment Feld and Schneider (2010). quota (GDP-growth), the higher the incentive to work in the shadow economy, ceteris paribus.

(7) Self-employment The higher the rate of self-employment, the more activities can Schneider and Williams (2013); be performed in the shadow economy, ceteris paribus. Feld and Schneider (2010).

Source: The author.

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(1) The discrepancy between national expenditure and economy) for the over the period 1919 to income statistics 1955. Cagan’s approach was further developed by Tanzi (1980, 1983), who econometrically estimated a curren- This approach is based on discrepancies between in- cy demand function for the United States for the period come and expenditure statistics. In national accounting 1929 to 1980 in order to calculate the size of the shadow the income measure of GNP should be equal to the ex- economy. His approach assumes that shadow (or hidden) penditure measure of GNP. Thus, if an independent es- transactions are undertaken in the form of cash pay- timate of the expenditure side of the national accounts is ments so as to leave no observable traces for the authori- available, the gap between the expenditure measure and ties. An increase in the size of the shadow economy will the income measure can be used as an indicator of the therefore increase the demand for currency. To isolate extent of the shadow economy.9 the resulting excess demand for currency, an equation for currency demand is estimated over time. All pos- (2) The discrepancy between the official and actual sible conventional factors, such as the development of labor force income, payment habits, interest rates, credit and other debt cards as a substitute for cash and so on, are con- A decline in labor force participation in the official econ- trolled for. Additionally, variables such as direct and in- omy can be seen as an indication of increased activity in direct tax burdens, government regulation, etc., which the shadow economy. If total labor force participation is are assumed to be major factors causing people to work assumed to be constant, then a decreasing official rate in the shadow economy, are included in the estimation of participation can be seen as an indicator of increased equation.13 shadow economic activities, ceteris paribus.10 (5) The physical input (electricity consumption) method (3) The transactions approach (i) The Kaufmann - Kaliberda Method This approach has been fully developed by Feige.11 It is based upon the assumption that there is a constant rela- To measure overall (official and unofficial) economic tion over time between the volume of transactions and activity in an economy, Kaufmann and Kaliberda (1996) official GNP, as summarized by the well-known Fisher assume that electric power consumption is regarded as quantity equation, or M*V = p*T (with M money, V ve- the single best physical indicator of overall (or official locity, p prices, and T total transactions). Assumptions plus unofficial) economic activity. Overall economic also have to be made about the velocity of money and activity and electricity consumption have been empir- about the relationships between the total value of trans- ically observed throughout the world to move in lock- actions p*T and total (official + unofficial) nominal step with an electricity-to-GDP elasticity usually close GNP. Relating total nominal GNP to total transactions, to one. This means that the growth of total electricity the GNP of the shadow economy can be calculated by consumption is an indicator for growth of overall (of- subtracting official GNP from total nominal GNP.12 ficial and unofficial) GDP. By having this proxy meas- urement for the overall economy and then subtracting (4) The currency demand approach from this overall measure the estimates of official GDP, Kaufmann and Kaliberda (1996) derive an estimate of The currency demand approach was first used by Cagan unofficial GDP. (1958), who considered the correlation between curren- cy demand and tax pressure (as one cause of the shadow (ii) The Lackó method

9 See, for example, Franz (1983) for Austria; MacAfee (1980), O’Higgins (1989) and Smith (1985) for Great Britain; Petersen (1982) Lackó (1998, 1999, 2000a,b) assumes that a certain part and Del Boca (1981) for Germany; Park (1979) for the United States. of the shadow economy is associated with the house- For a critical survey, see Thomas (1992). 10 Such studies have been made for , see for example Contini (1981) hold consumption of electricity. This part comprises and Del Boca (1981); for the United States, see O’Neill (1983), for later studies, see Williams (2009, 2013), Williams and Lansky (2013) and so-called household production, do-it-yourself activi- Williams and Rodgers (2013), for a critical survey, see Thomas (1992). ties, and other non-registered production and services. 11 For an extended description of this approach, see Feige (1996); for a further application for the , Boeschoten and Fase (1984) Lackó further assumes that in countries where the por- and for Germany, Langfeldt (1984). 12 For a detailed criticism of the transaction approach, see Boeschoten 13 The estimation of such a currency demand equation has been criti- and Fase (1984), Frey and Pommerehne (1984), Kirchgässner (1984), cized by Thomas (1999), but part of this criticism has been considered Tanzi (1982a,b, 1986), Dallago (1990), Thomas (1986, 1992, 1999) and by the work of Giles (1999a,b) and Bhattacharyya (1999), who both use Giles (1999a). the latest econometric techniques.

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Table 2

Size of the shadow economy of the 28 EU-countries, 2003 – 2016 (in % of official GDP)

Country / Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Austria 10.8 11.0 10.3 9.7 9.4 8.1 8.5 8.2 7.9 7.6 7.5 7.8 8.2 7.8

Belgium 21.4 20.7 20.1 19.2 18.3 17.5 17.8 17.4 17.1 16.8 16.4 16.1 16.2 16.1

Bulgaria 35.9 35.3 34.4 34.0 32.7 32.1 32.5 32.6 32.3 31.9 31.2 31.0 30.6 30.2

Croatia 32.3 32.3 31.5 31.2 30.4 29.6 30.1 29.8 29.5 29.0 28.4 28.0 27.7 27.1

Czech Republic 19.5 19.1 18.5 18.1 17.0 16.6 16.9 16.7 16.4 16.0 15.5 15.3 15.1 14.9

Denmark 17.4 17.1 16.5 15.4 14.8 13.9 14.3 14.0 13.8 13.4 13.0 12.8 12.0 11.6

Estonia 30.7 30.8 30.2 29.6 29.5 29.0 29.6 29.3 28.6 28.2 27.6 27.1 26.2 25.4

Finland 17.6 17.2 16.6 15.3 14.5 13.8 14.2 14.0 13.7 13.3 13.0 12.9 12.4 12.0

France 14.7 14.3 13.8 12.4 11.8 11.1 11.6 11.3 11.0 10.8 9.9 10.8 12.3 12.6

Germany 1) 16.7 15.7 15.0 14.5 13.9 13.5 14.3 13.5 12.7 12.5 12.1 11.6 11.2 10.8

Greece 28.2 28.1 27.6 26.2 25.1 24.3 25.0 25.4 24.3 24.0 23.6 23.3 22.4 22.0

Hungary 25.0 24.7 24.5 24.4 23.7 23.0 23.5 23.3 22.8 22.5 22.1 21.6 21.9 22.2

Ireland 15.4 15.2 14.8 13.4 12.7 12.2 13.1 13.0 12.8 12.7 12.2 11.8 11.3 10.8

Italy 26.1 25.2 24.4 23.2 22.3 21.4 22.0 21.8 21.2 21.6 21.1 20.8 20.6 20.2

Latvia 30.4 30.0 29.5 29.0 27.5 26.5 27.1 27.3 26.5 26.1 25.5 24.7 23.6 22.9

Lithuania 32.0 31.7 31.1 30.6 29.7 29.1 29.6 29.7 29.0 28.5 28.0 27.1 25.8 24.9

Luxembourg 9.8 9.8 9.9 10.0 9.4 8.5 8.8 8.4 8.2 8.2 8.0 8.1 8.3 8.4 (Grand-Duché) 26.7 26.7 26.9 27.2 26.4 25.8 25.9 26.0 25.8 25.3 24.3 24.0 24.3 24.0

Netherlands 12.7 12.5 12.0 10.9 10.1 9.6 10.2 10.0 9.8 9.5 9.1 9.2 9.0 8.8

Poland 27.7 27.4 27.1 26.8 26.0 25.3 25.9 25.4 25.0 24.4 23.8 23.5 23.3 23.0

Portugal 22.2 21.7 21.2 20.1 19.2 18.7 19.5 19.2 19.4 19.4 19.0 18.7 17.6 17.2

Romania 33.6 32.5 32.2 31.4 30.2 29.4 29.4 29.8 29.6 29.1 28.4 28.1 28.0 27.6

Slovakia 18.4 18.2 17.6 17.3 16.8 16.0 16.8 16.4 16.0 15.5 15.0 14.6 14.1 13.7

Slovenia 26.7 26.5 26.0 25.8 24.7 24.0 24.6 24.3 24.1 23.6 23.1 23.5 23.3 23.1

South- 28.7 28.3 28.1 27.9 26.5 26.0 26.5 26.2 26.0 25.6 25.2 25.7 24.8 24.2 Cyprus 22.2 21.9 21.3 20.2 19.3 18.4 19.5 19.4 19.2 19.2 18.6 18.5 18.2 17.9

Sweden 18.6 18.1 17.5 16.2 15.6 14.9 15.4 15.0 14.7 14.3 13.9 13.6 13.2 12.6

United 12.2 12.3 12.0 11.1 10.6 10.1 10.9 10.7 10.5 10.1 9.7 9.6 9.4 9.0 Kingdom

28 EU-coun- tries / Average 22.6 22.3 21.8 21.1 20.3 19.6 20.1 19.9 19.6 19.3 18.8 18.6 18.3 17.9 (unweighted)

1) The shadow economy values for Germany have been adjusted due to a change in the official GDP statistics of the German national accounts. Source: Author's calculations, December 2015; values for 2015 and 2016 are projections on the basis of preliminary values.

CESifo DICE Report 4/2016 (December) 48 Research Report tion of the shadow economy associated with household cation of a factor and a structural model. In this sense, electricity consumption is high, the rest of the hidden the MIMIC model tests the consistency of a “structural” economy (or the part Lackó cannot measure) will also be theory through data and is thus a confirmatory, rather high. Lackó (1996, 19 ff.) assumes that in each country a than an exploratory technique. An economic theory is part of the household consumption of electricity is used thus tested examining the consistency of actual data in the shadow economy. with the hypothesized relationships between the unob- servable (latent) variable or factor and the observable (measurable) variables. The model approach

All of the methods described to date consider just one Size of the shadow economies of 31 European and indicator to capture all effects of the shadow economy. five other OECD countries However, shadow economy effects show up simulta- neously in production, labor and money markets. The In the Tables 2 to 4 the size and development of 31 model approach explicitly considers multiple causes of European and of five non-European shadow economies the existence and growth of the shadow economy, as over the period 2003–2016 are presented.14 If we first well as the multiple effects of the shadow economy over consider the results for the average size of the shadow time. The empirical method used is quite different from economy of the 28 countries in Table 2, those deployed to date. It is based on the statistical the- we realize that the shadow economy in the year 2003 was ory of unobserved variables, which considers multiple 22.6% (of official GDP), which decreased to 19.6% in causes and multiple indicators of the phenomenon to be 2008 and increased to 20.1% in 2009 and then decreased measured. again to 17.9% in 2016.15 With respect to a decrease or increase in 2016, the development of the shadow econ- As the size of the shadow economy is an unknown omy in the individual countries will not be uniform. (hidden) figure, a latent estimator approach using the In most EU-countries (25 out of 28) the shadow econ- MIMIC (i.e. multiple indicators, multiple causes esti- omy will further decrease, but in the remaining three mation) procedure is applied. This method is based on countries it will increase. The 25 EU-countries where the statistical theory of unobserved variables. The sta- the shadow economy will further decrease are Austria, tistical idea behind such a model is to compare a sample , Bulgaria, , the Czech Republic, covariance matrix, that is, a covariance matrix of ob- Denmark, , Finland, Germany, , Ireland, servable variables, with the parametric structure im- posed on this matrix by a hypothesized model. Using 14 The size and development of the shadow economy is calculated us- covariance information among the observable variables, ing the MIMIC (Multiple Indicators and Multiple Causes) estimation procedure. Using the MIMIC estimation procedure one gets only rel- the first step consists of linking the unobservable varia- ative values and one needs other methods like the currency demand approach or the income discrepancy method, to calibrate the MIMIC ble to observable variables in a factor analytical model, values into absolute ones. For a detailed explanation of these calcula- also called a measurement model. Secondly, relation- tion methods, see Schneider (2011) and Schneider and Williams (2013). Due to space constraints, the econometric estimation results are not between the unobservable variable and observa- shown here; compare for example Buehn and Schneider (2012). ble variables are specified through a structural model. 15 The calculated values for 2015 are projections for some countries, for 2016 they are projections for all countries, based on the forecasts of Therefore, a MIMIC model is the simultaneous specifi- the official figures (GDP, unemployment, etc.) of these countries.

Table 3

Size of the shadow economy of three European countries (non-EU Members), 2003 – 2016 (in % of official GDP)

Country / Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Norway 18.6 18.2 17.6 16.1 15.4 14.7 15.3 15.1 14.8 14.2 13.6 13.1 13.0 12.6

Switzerland 9.5 9.4 9.0 8.5 8.2 7.9 8.3 8.1 7.8 7.6 7.1 6.9 6.5 6.2

Turkey 32.2 31.5 30.7 30.4 29.1 28.4 28.9 28.3 27.7 27.2 26.5 27.2 27.8 29.2 Three non-EU countries / Average 20.1 19.7 19.1 18.3 17.6 17.0 17.5 17.2 16.8 16.3 15.7 15.7 15.8 16.0 Unweighted average of all 31 European countries 22.4 22.1 21.6 20.9 20.1 19.4 19.9 19.7 19.3 19.0 18.5 18.3 18.0 17.8 Source: Author's calculations, December 2015; values for 2015 and 2016 are projections on the basis of preliminary values.

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Table 4 Size of the shadow economy of five highly-developed non-European countries, 2003 – 2016 (in % of official GDP) Country / Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Australia 13.7 13.2 12.6 11.4 11.7 10.6 10.9 10.3 10.1 9.8 9.4 10.2 10.3 9.8 Canada 15.3 15.1 14.3 13.2 12.6 12.0 12.6 12.2 11.9 11.5 10.8 10.4 10.3 10.0 Japan 11.0 10.7 10.3 9.4 9.0 8.8 9.5 9.2 9.0 8.8 8.1 8.2 8.4 8.5 New Zealand 12.3 12.2 11.7 10.4 9.8 9.4 9.9 9.6 9.3 8.8 8.0 7.8 8.0 7.8 United States 8.5 8.4 8.2 7.5 7.2 7.0 7.6 7.2 7.0 7.0 6.6 6.3 5.9 5.6 Other OECD countries / Unweighted average 12.2 11.9 11.4 10.4 10.1 9.6 10.1 9.7 9.5 9.2 8.6 8.6 8.6 8.3 Source: Author's calculations, December 2015; values for 2015 and 2016 are projections on the basis of preliminary values.

Italy, , , Malta, the Netherlands, , find a similar movement over time (see Table 4); in 2003 , Romania, , South-Cyprus, Spain, the shadow economies of these five countries had an av- , and the , whereas erage size of 12.2%, in 2008 this value was only 9.6%. the shadow economy will increase in , In 2009 it increased to 10.1% and then decreased again and . The strongest increase will take to 8.6% of GDP in 2015. In 2016 the shadow economy place in France from 12.3% of official GDP (2015) to will decrease in Australia, Canada, New Zealand and 12.6% in 2016 and in Hungary from 21.9% of GDP in the US and it will increase in Japan from 8.4% (2015) 2015 to 22.2% in 2016; the strongest decrease will be in to 8.5% in 2016, respectively. On average in 2016 the Lithuania from 25.8% (2015) to 24.9% in 2016. size of the shadow economy in these five countries will decrease to a value of 8.3%. To summarize, in the vast majority of the 28 EU coun- tries the shadow economy will continue to shrink, aver- If we consider the size of the shadow economies over aging 17.9% of official GDP in 2016. If we compare these the last two years (2015 and 2016) and compare it to results to the average size of the shadow economy of that of 2008/09, we realize that, in most countries, we the 31 European countries, it was 22.4% in 2003, which will again see a decrease in the size and development of shrank to 19.4% in 2008, then increased to 19.9% in the shadow economy, which is due to the recovery from 2009 and subsequently decreased to 18.0% in 2015 (see the worldwide economic and financial crises. Hence, Table 3). In 2016 the average size will further decrease the most important reason for this decrease is that, if to 17.8%. When looking at the individual countries the official economy is recovering or booming, people again, the shadow economy will decrease in Norway have fewer incentives to undertake additional activi- and , whereas it will increase in from ties in the shadow economy and to earn extra “black” 27.8% (2015) to 29.2% of official GDP in 2016. money.

If we consider the development of the shadow economy In short, there are four different developments with of the highly-developed non-European OECD countries respect to the size of the shadow economy of these 36 Australia, Canada, Japan, New Zealand and the US, we European and non-European countries:

Table 5 Size of the shadow economy of various unweighted averages, 2003 – 2016 (in % of official GDP)

Average / Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

28 EU-countries / Average (unweighted) 22.6 22.3 21.8 21.1 20.3 19.6 20.1 19.9 19.6 19.3 18.8 18.6 18.3 17.9 Three non-EU countries / Average (unweighted) 20.1 19.7 19.1 18.3 17.6 17.0 17.5 17.2 16.8 16.3 15.7 15.7 15.8 16.0 Five other OECD countries / Average (unweighted) 12.2 11.9 11.4 10.4 10.1 9.6 10.1 9.7 9.5 9.18 8.6 8.6 8.6 8.3 All 36 countries / Average (unweighted) 21.0 20.7 20.2 19.4 18.7 18.0 18.5 18.3 18.0 17.6 17.1 17.0 16.7 16.4 Source: Author's calculations, December 2015; values for 2015 and 2016 are projections on the basis of preliminary values.

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Figure 1 Figure 2

Size of the shadow economy of 31 European countries Size of the shadow economy of 31 European countries 2016 2015 Bulgaria 30.2 Bulgaria 2012 30.6 Turkey 29.2 Romania 28.0 Romania 27.6 Turkey 27.8 Croatia 27.1 Croatia 27.7 Estonia 25.4 Estonia 26.2 Lithuania 24.9 Lithuania 25.8 South-Cyprus 24.2 South-Cyprus 24.8 Malta 24.0 Malta 24.3 Slovenia 23.1 Latvia 23.6 Poland 23.0 Poland 23.3 Latvia 22.9 Slovenia 23.3 Hungary 22.2 Greece 22.4 Greece 22.0 Hungary 21.9 Italy 20.2 Italy 20.6 Spain 17.9 Spain 18.2 Average 17.8 Average 18.0 Portugal 17.2 Portugal 17.6 Belgium 16.1 Belgium 16.2 Czech Rep. 14.9 Czech Rep. 15.1 Slovakia 13.7 Slovakia 14.1 France 12.6 Sweden 13.2 Sweden 12.6 Norway 13.0 Norway 12.6 Finland 12.4 Finland 12.0 France 12.3 Denmark 11.6 Denmark 12.0 Germany 10.8 Ireland 11.3 Ireland 10.8 Germany 11.2 United Kingdom 9.0 United Kingdom 9.4 Netherlands 8.8 Netherlands 9.0 Luxembourg 8.4 Luxembourg 8.3 Austria 7.8 Austria 8.2 Switzerland 6.2 Switzerland 6.5

0510 15 20 25 30 35 0 5 10 15 20 25 30 35 in % of official GDP in % of official GDP Note: December 2015; values for 2015 and 2016 are projections on the basis Note: December 2015; values for 2015 and 2016 are projections on the basis of preliminary values. of preliminary values. Source: Author's calculations. Source: Author's calculations.

(1)  In general, the shadow economy continues to shrink which will decrease to 8.3% in 2016 (compare Tables in 31 out of the 36 highly-developed countries, which 4 and 5). is mainly due to a further recovery of the official economy. In five countries, by contrast, the shadow Summary and concluding remarks: economy is growing due to a sluggish official econ- problems and open questions omy or policy decisions that boosted the shadow economy. This article briefly presents the various methods for estimating the size of the shadow economy and shows (2) The eastern or central European countries and/or the the latest estimates of the size of the shadow economies “new” European Union members, such as Bulgaria, of 36 highly-developed countries over 2005 to 2016. Cyprus, the Czech Republic, Latvia, Lithuania and Differences in the development of the shadow econo- Poland have higher shadow economies than the “old” mies of these 36 countries are also discussed. European Union countries, like Austria, Belgium, Germany and Italy. Hence, the size of the shadow What conclusions can be drawn? economy grows from west to east. (1) Besides a general decrease in the size of the shad- (3) An increase in the size and development of the shad- ow economy from 2002 to 2008, we see an increase ow economy can also be seen from north to south. from 2008 to 2009/2010. On average, the southern European countries have considerably larger shadow economies than those of (2) Since 2011 there has been no homogeneous develop- central and western Europe. This can also be demon- ment in the size of the shadow economy in these 36 strated by Figures 1 and 2. countries over time.

(4) The five non-European highly-developed OECD (3) To reduce the size of a shadow economy, different countries (Australia, Canada, Japan, New Zealand incentive-oriented measures should be used, such and the United States) have lower shadow econo- as temporarily exempting the value-added tax on la- mies that account for around 10.1% of GDP in 2009, bor-intensive products.

51 CESifo DICE Report 4/2016 (December) Research Report

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