Theshadow economy is the economic and criminological generic term for all economic activities from which income is generated – legally or illegally – but from which state market regulation, taxation or statistical recording is avoided.
The shadow economy in the broader sense comprises the self-supply economy, including the informal sector of the economy, as well as the shadow economy in the narrower sense with undeclared work and the black market.
The share of the shadow economy in Germany is (depending on the estimate) 5-10% of the gross domestic product. In 2019, the size of the shadow economy is said to have been 319 billion euros, or about nine percent of the gross domestic product. The share has been declining since 2009 (as of 2019).
Concept and delimitations
In the literature, only the illegal part of these economic activities is sometimes referred to as the shadow economy in the narrower sense. The following table provides an overview:
|Shadow economy in the broader sense|
|Self-sufficiency economy (legal)||Shadow economy in the narrower sense (illegal)|
|Economic sector||Domestic sector||Informal sector||Irregular sector||Criminal sector|
|Examples/subterms||Neighbourhood help Self-sufficiency||Informal economy||Moonlighting||Black market|
Forms and characteristics
In terms of economic theory, an economic subject then shifts into the shadow economy if the state taxes and duties or the regulatory hurdles are perceived to be so high that shirking appears to be advantageous. A no longer functioning economic or social system can also be the cause.
Expressly prohibited economic activities must, by definition, take place entirely in the shadow economy. Here, there is no alternative for the economic subject (except to abandon the corresponding activity).
Typical manifestations of the shadow economy are:
- Undeclared work in which workers are not registered and thus no social security contributions and no wage taxes are paid(illegal employment). If at the same time state social benefits are still being received, this constitutes a punishable abuse of transfer benefits.
- A special variant of undeclared work is the exercise of craft activities without the required professional qualification (journeyman’s certificate, master craftsman’s certificate) or business registration. In Germany, a person thus working illegally does not fulfil the requirements necessary for their work (such as a state licence), although no tax evasion is involved. Economic sectors particularly affected include construction and domestic and family work in private households.
- Black cash through cash deposits or cash disbursements without booking and without receipt.
- Tax evasion in any form.
- Money laundering through the infiltration of illegally generated money or illegally acquired assets into the legal financial and economic cycle.
- Black market, i.e. illegal trade without invoices being issued and sales taxes being paid. This term also includes trade in prohibited goods such as drugs, weapons, fencing of stolen goods, etc.
- Smuggling, i.e. illegal import (rarely export) of goods or services. The state misses out on the customs duty due.
- Illegal foreign exchange transactions. They were common before the introduction of the euro, the liberalisation of global financial markets and the introduction of internet banking; today they are rare. There used to be more foreign exchange restrictions and more currencies with restricted convertibility.
Negative consequences of the shadow economy are a lack of tax revenue and social security contributions. However, these are compensated for to some extent: By circumventing taxes and duties, the relative price of a good is cheaper in the shadow economy than in the formal economy. This allows additional demand to be siphoned off and satisfied below the prevailing market price. Some of the revenues from shadow economy activities flow back into the official economy, where they are used for transactions subject to taxes and duties.
Scope and development
The size of the shadow economy in the narrower sense can only be estimated. As a rule, estimates are published as a percentage of gross domestic product (GDP). The national accounts capture the shadow economy by including shadow economic activities with estimated surcharges in their calculation methods.
The size of the shadow economy has increased significantly in Germany since 1970 (only 2.7%-3.0% of official GDP). At the beginning of the 1990s it already amounted to more than 12 % of GDP and reached a peak of 17.1 % in 2003. In the following years, it declined again somewhat and in 2005 still amounted to 15.4% of GDP. A further decline to 14.7 % is expected for 2006, as the legal changes to the tax deductibility of household-related services, childcare and care services are already expected to have an impact on this. In 2010, a slight decrease in the shadow economy could be observed. The total volume of the shadow economy is quantified at approx. 347.6 billion euros, which corresponds to a ratio of the shadow economy to official GDP of 13.91 %. For the year 2011, a total volume of approx. 345.8 billion euros is forecast, which corresponds to a decline to approx. 344 billion euros or 13.2 %. According to the model calculations, the ratio of the shadow economy to official GDP will remain unchanged at 12.2 % in 2015 compared to 2014, with a total volume of 339 billion euros.
In comparison with the OECD countries, Germany is thus in the middle of the field. Greece (22.4 %), Italy (20.1 %), Spain (18.2 %) and Portugal (17.6 %) are at the top. Switzerland (6.5 %) and the USA (5.9 %) have the lowest share of the shadow economy in their respective GDPs (as of 2015).
The normalization of national shadow economies to the respective GDP (shadow economy/GDP) provides valuable information on how much national tax revenues would theoretically be increased if the efficiency of tax collection could be increased in a cost-neutral manner. In practice, however, the efficiency of tax collection turns out to be costly and quite heterogeneous, because it depends significantly on the sector. The construction industry can be cited as a typical example of low tax morale, whereas tax evasion is hardly possible in the financial sector. Thus, while the construction industry contributes significantly to the shadow economy in a similar way in all countries, the financial industry only takes national GDP to extreme heights in individual cases. The shadow economy in Luxembourg, for example, appears to be the smallest in the EU at around 8 % of GDP, although it is the highest per capita of all EU states.
In this respect, GDP-normalized data alone do not really do justice to the estimation of the size of the shadow economy and its analysis of causes. Nevertheless, they are used for political analyses, especially in countries with extremely high GDP.
- Human Trafficking
- Organ Trafficking
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- Declining shadow economy: curse or blessing? in perspective:blue
- Shadow Economies of 145 Countries all over the World: What do we really know?
- Klaus Schubert, Martina Klein: Das Politiklexikon. 5., updated. Auflage. Dietz, Bonn 2011.
- Markus Dettmer, Marcel Rosenbach, Cornelia Schmergal: In der Schattenwelt. In: Der Spiegel. No. 42, 2019, pp. 44-47 (online – October12, 2019).
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- Study by the Institute for Applied Economic Research (IAW) on the development of the shadow economy 2011
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- Friedrich Schneider: TheShadow Economy in Europe. University of Linz, 2013.