In from the Shadow

What to do about the extent of unregulated “informal” employment and the size of the shadow economy is a dilemma that has been gaining urgency, particularly in Europe’s periphery. The forces that accompany globalization put a premium on mobility and skill-renewal. Rapid population ageing will require that people work longer and be far more productive. To achieve this, social and economic institutions have to be more “pro-employment”, encouraging greater participation in the regulated “formal” sector. And looking ahead, public financial resources will be increasingly scarce, giving urgency to measures that can significantly and sustainably increase tax revenue. This volume is about workers in Europe who earn a living working full or part-time in untaxed markets for goods, services and labor. Their activities are not registered as part of the economy, and because they go unrecorded, they are also unregulated. This makes them illegal although not in essence criminal. Some call this the “underground economy”, “black market” or the “shadow economy”. Informal employment in the shadow economy posses problems individuals and their families, but it is also for firms and society.

This volume presents the rationale and steps policy makers in the EU’s newest member countries should take to bring as much economic activity in from the shadow economy as they can. Deriving specific policy guidance and recommendations from rigorous analysis using administrative and unit-level survey data. The authors take full account of specific structural incentives and institutional contexts, and from these draw detailed recommendations. From the conceptual framework and empirical evidence presented in this volume, a set of general policy suggestions are offered to EU members, old and new, as well as those who aspire to join the Union. This policy guidance will resonate with decision makers in upper-middle income and high income countries in other parts of the world. The findings presented in this volume on which these general suggestions are based, are substantiated in 10 background papers available as part of the World Bank’s Policy Research Working Paper series.