The shadow economy

6.2. The shadow economy and unemployment in the European Union

Further work has been undertaken by Williams and Nadin (2012), who analyse groups of EU countries in greater detail using the results of the 2007 Eurobarometer survey. Specifically, they examine the idea that the unemployed disproportionately participate in, and gain from, undeclared work (the ‘marginalisation’ thesis) and the ‘reinforcement’ thesis, which holds that the unemployed benefit less from undeclared work than those in declared employment, meaning that undeclared work reinforces, rather than reduces, the inequalities produced by the formal economy. Which of these explanations is valid is potentially an important policy issue. These two phenomena are not entirely mutually exclusive.
Table 23 contains data which allows us to evaluate which of these theses is valid in different parts of the EU-27. In Nordic nations, only 9 per cent of the unemployed participate in undeclared work compared with 12 per cent of the employed and 20 per cent of other non-employed. The result is that, although the unemployed constitute 4 per cent of the surveyed population, they conduct just 3 per cent of all undeclared work and receive just 2 per cent of all undeclared income. Indeed, the employed receive considerably higher pay per hour from shadow work than the unemployed. This suggests that the reinforcement thesis is more important in these countries.
The marginalisation thesis would appear to be valid, however – at least to some extent – in western Europe, east-central Europe and southern Europe. In western Europe, 6 per cent of the unemployed conduct undeclared work compared with 5 per cent of the employed and 4 per cent of other non-employed. In east-central Europe 12 per cent of the unemployed conduct undeclared work but just 7 per cent of the employed and 3 per cent of other non-employed. In southern Europe, 12 per cent of the unemployed conducted undeclared work in the last twelve months but just 2 per cent of the employed and 2 per cent of the other non-employed.