Abstract
The direct approaches to measuring the shadow economy have not been used extensively until very recently. A relatively simple method has been developed (Talis J. Putnins and Arnis Sauka 2015) using an income approach to measuring GDP and exploiting survey data on unreported employee wages and the business income generated by enterprises, which was provided by owners/managers of such enterprises. This paper illustrates the advantages of this approach over indirect ones through applying it to two EU candidate countries. This is first done by measuring the size of the shadow economy and then by providing estimates of the factors which cause enterprises to engage in shadow economic activity. Estimates of these factors suggest a number of policy approaches that could reduce the size of the shadow economy in countries similar to the ones we have used here.
Highlights
The shadow economy index obtained from Equation (3) relates to the economic activity of three sectors included in the enterprises survey
The availability high-quality survey data from enterprises and entrepreneurs in conjunction with a new method of measuring the shadow economy permits us to draw a number of important conclusions regarding the nature of the shadow economy in these countries
Our results revealed that a significant share of the overall economy in Montenegro and in Serbia was generated in the shadow economy and was estimated to be equivalent to around a quarter of their official GDP
Summary
We have followed the methodology suggested by Putninš and Sauka (2015). This is based on an income approach to measuring GDP and exploits data from the enterprise survey regarding both unreported personal incomes and business incomes. It is assumed that the wages of the unregistered employees are, on average, equal to the wages of registered employees By taking both components into consideration, the total unreported proportion of employee remuneration of enterprise i (UReri) is: UReri = 1 − (1 − URsi)(1 − URei). The weighted average of underreported personal incomes and underreported business income (URbi) for each enterprise represents an estimate of the unreported or shadow proportion of an enterprise’s production (income): ShadowProportioni = αUReri + (1 − α)URbii,. The weights wi represent the relative contribution of each enterprise to GDP in the country, which is approximated by the proportion of total wages paid by the enterprise to the total wages of all enterprises in the representative sample. We take into account both the size of the shadow economy in each enterprise as enterprises in some sectors (for example construction and services) may have large underreported incomes relative to other enterprises (for example, building machineries), and the relative contribution of each enterprise to GDP
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