The shadow economy

Smoothing the transition to self-employment
Unemployed people often represent only a small proportion of ah persons engaged in the shadow economy (e.g. Jensen et al., 1995; Leonard, 1998; Pahl, 1984; Renooy, 1990; Williams, 2004a, 2004b, 2004c). Despite this, a vast amount of energy and attention is devoted to tackling the unemployed engaged in the shadow economy. The result has been many initiatives to ease the transition from unemployment to self-employment. Less attention has been paid to easing the transition from employment to self- employment, despite the evidence that the vast majority of the newly self-employed have previously been employees rather than unemployed (Williams, 2007) and that those in formal employment often start up their business ventures on an ‘on-the-side’ undeclared basis in the first instance (Williams, 2008). This lack of attention to smoothing the transition from employment to legitimate self-employment is a major gap in policy that still needs to be addressed.

9.2. Encouraging movement out of the shadow economy.

To ‘pull’ businesses and workers out of the shadow economy, measures can be targeted either at the shadow workforce itself or the hirers of such labour. These measures fall into a number of different categories.


Society-wide amnesties
Society-wide amnesties have been used to tackle the shadow economy in many countries (e.g. Hasseldine, 1998; Lopez Laborda and Rodrigo, 2003; Torgler and Schaltegger, 2005). In Italy, for example, a six-month amnesty in 2001 generated €1.4 billion additional tax revenue, which constituted 0.4 per cent of total tax revenue (Torgler and Schaltegger, 2005). Another amnesty in Italy in 2003 resulted in 703,000 illegal immigrants coming forward, 48.6 per cent of whom were women employed in shadow work as domestic workers and care providers (Ghezzi, 2009). Indeed, since 1982, more than sixty amnesty programmes have been conducted in the USA with strong variations in the repatriated revenues across different states (Torgler and Schaltegger, 2005). In a comprehensive review of 43 of these tax amnesties pursued in 35 US states between 1982 and 1997, Hasseldine (1998) shows that the collection rate ranged from 0.008 to 2.6 per cent of total tax revenues.

One option might be to consider an amnesty which would allow undeclared activities to gradually move towards legitimisation over a transition period of, say, two years, without involving any sanctions. At the end of the period stronger sanctions would be introduced for those who continue to work in the shadow economy (European Parliament Committee on Employment and Social Affairs, 2008:7).