Explaining the Shadow Economy in Europe: Size, Causes and Policy Options
30 Pages Posted: 22 Jan 2020
Date Written: December 2019
This paper examines the drivers, and reestimates the size of shadow economies in Europe, with a focus on the emerging economies, and recommends policies to increase formality. The size of shadow economies declined across Europe in recent years but remains significant, especially in Eastern Europe. In the emerging European economies, the key determinants of shadow economy size are regulatory quality, government effectiveness, and human capital. The paper argues that a comprehensive package of reforms, focused on country-specific drivers, is needed to successfully combat the shadow economy. The menu of policies most relevant for Europe's emerging economies include: reducing regulatory and administrative burdens, promoting transparency and improving government effectiveness, as well as improving tax compliance, automating procedures, and promoting electronic payments.
Keywords: Shadow economy, Labor market reforms, Labor force participation, Labor market regulations, Labor market policy, informal economy, WP, government effectiveness, percent of GDP, formal sector, informality, informal worker
JEL Classification: O17, O52, H26, E01, E2, Z13, H2, I3
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