Labor Institutions and Their Impact on Shadow Economies in Europe

This paper analyzes the role of labor market institutions in explaining the development of shadow economies in European countries. The analysis uses several alternative measures of the shadow sector, and examines the effects of labor institutions o...

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Bibliographic Details
Main Authors:	Fialova, Kamila, Schneider, Ondrej
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ACCESS TO CAPITAL ACTIVE LABOR ACTIVE LABOR MARKET ACTIVE LABOR MARKET POLICY ADJUSTMENT COSTS ADMINISTRATIVE PROCEDURES ADVERSE EFFECT ADVERSE EFFECTS AGRICULTURE AVERAGE UNEMPLOYMENT AVERAGE UNEMPLOYMENT RATE AVERAGE WAGE BANKRUPTCY BUSINESS CYCLE CENTRALIZATION CERTAIN EXTENT CHECKS COLLECTIVE BARGAINING COLLECTIVE DISMISSALS CONTRACT ENFORCEMENT CORPORATE TAX RATES CURRENCY DEADWEIGHT DEVELOPED COUNTRIES DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DRIVERS DUMMY VARIABLE DUMPING EARNING ECONOMETRIC ANALYSIS ECONOMETRIC MODELS ECONOMIC ACTIVITY ECONOMIC BOOM ECONOMIC CONSEQUENCES ECONOMIC COSTS ECONOMIC DEVELOPMENT ECONOMIC FACTORS ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC RESEARCH ECONOMIC SECTORS ECONOMIC THEORY ECONOMICS EFFICIENCY OF LABOR EMPIRICAL EVIDENCE EMPIRICAL RESEARCH EMPIRICAL STUDIES EMPLOYABILITY EMPLOYMENT EMPLOYMENT COMPOSITION EMPLOYMENT LEGISLATION EMPLOYMENT PROTECTION LEGISLATION ENFORCEMENT OF CONTRACTS ENTITLEMENTS ENVIRONMENTAL ENVIRONMENTS EQUILIBRIUM EXPENDITURE EXPENDITURES FINANCIAL MARKETS GDP GDP PER CAPITA GOVERNMENT REGULATIONS GROSS DOMESTIC PRODUCT GROWTH RATE HOUSEHOLD SURVEY HUMAN CAPITAL HUMAN DEVELOPMENT IMPLICIT TAX INCOME INCOME SUPPORT INCOME TAXES INEFFICIENCY INFORMAL ECONOMY INFORMAL EMPLOYMENT INFORMAL LABOR MARKET INFORMAL LABOR MARKETS INFORMAL SECTOR INTERNATIONAL BANK JOB OFFER JOBS LABOR COSTS LABOR FORCE LABOR FORCE PARTICIPATION LABOR MARKET LABOR MARKET FLEXIBILITY LABOR MARKET INDICATORS LABOR MARKET INSTITUTION LABOR MARKET INSTITUTIONS LABOR MARKET PERFORMANCE LABOR MARKET POLICIES LABOR MARKET POLICY LABOR MARKET REGULATION LABOR MARKET REGULATIONS LABOR MARKET RIGIDITIES LABOR MARKET RIGIDITY LABOR MARKETS LABOR REGULATION LABOR REGULATIONS LABOR STANDARDS LABOR SUPPLY LEGAL ENVIRONMENT LEGAL FRAMEWORK LEGAL PROTECTION LESS DEVELOPED COUNTRIES LIBERALIZATION OF CAPITAL ACCOUNT LIVING CONDITIONS M1 MACROECONOMIC POLICIES MACROECONOMIC STABILIZATION MARKET FACTORS MINIMUM WAGE MINIMUM WAGES MONOPSONY MOTIVATION OCCUPATIONS OPPORTUNITY COSTS PAID WORKERS PASSIVE LABOR PAYROLL TAXES PENSION PENSION SYSTEM PENSION SYSTEMS PENSIONS POSITIVE COEFFICIENT POSITIVE EFFECTS PREVIOUS SECTION PREVIOUS STUDIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PROPERTY RIGHTS PUBLIC BUDGETS PUBLIC FINANCE PUBLIC GOODS PUBLIC SERVICES PURCHASING POWER REGRESSION ANALYSIS REGULAR EMPLOYMENT REGULATORY FRAMEWORK RETURN RULE OF LAW SERVICE SECTOR SOCIAL COHESION SUBSTITUTION EFFECTS TAX TAX COLLECTION TAX COLLECTIONS TAX RATE TAX RATES TAX REVENUES TAX SYSTEM TAXATION TEMPORARY EMPLOYMENT TEMPORARY WORK TOTAL LABOR FORCE TRADE REFORMS TRADE UNION TRADE UNIONS TRANSITION COUNTRIES TRANSITION ECONOMIES UNEMPLOYED UNEMPLOYMENT UNEMPLOYMENT BENEFITS UNEMPLOYMENT INSURANCE UNEMPLOYMENT INSURANCE SYSTEM UNEMPLOYMENT RATE UNFAIR COMPETITION UNION DENSITY VALUE ADDED WAGE DETERMINATION WAGE INCREASES WAGE LEVEL WAGE RATES WORKERS
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111213092248 http://hdl.handle.net/10986/3682

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Summary:	This paper analyzes the role of labor market institutions in explaining the development of shadow economies in European countries. The analysis uses several alternative measures of the shadow sector, and examines the effects of labor institutions on the shadow sector in two specific regions: new and old European Union member countries, as their respective shadow sectors exhibited a different development in the past decade. Although the share of the shadow economy in gross domestic product averaged 27.5 percent in the new member countries in 1999-2007, the respective share in the old member states stood at 17.9 percent. The paper estimates the effects of labor market institutions on two sets of shadow economy indicators -- shadow production and shadow employment. Comparing alternative measures of the shadow sector allows a more granulated analysis of labor market institution effects. The results indicate that the one institution that unambiguously increases shadow economy production and employment is the strictness of employment protection legislation. Other labor market institutions -- active and passive labor market policies, labor taxation, trade union density, and the minimum wage setting -- have less straightforward and statistically robust effects and their impacts often diverge in new and old European Union member countries. The differences are not robust enough, however, to allow for rejecting the hypothesis of similar effects of labor market institutions in new and old European Union member states.

Labor Institutions and Their Impact on Shadow Economies in Europe

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