Highlighting the Driving Forces of the Shadow Economy Among EU Countries: An Empirical Investigation Based on the MIMIC Approach

The chapter aims to reveal the main driving forces of the shadow economy among EU countries using an improved Multiple Indicators Multiple Causes (MIMIC) model grounded in an evidence-based approach putting together the multilevel approach and the dataset of Special Eurobarometer on undeclared work no.402/2013. Therefore, using the multilevel logistic regression model based on the hierarchical nature of the data (individuals within countries), it can be highlighted that in countries with lower levels of economic development, lower qualities of government, a high level of corruption, a lower level of happy planet, a lower level of social progress, smaller levels of ALMP expenditures, lower level of social expenditures and less effective redistribution via social transfers, high unemployment and self-employment levels or low level of tax morale, salary under-reporting is more prevalent. Incorporating all these variables with a crucial role in explaining undeclared work and testing for additional variables from literature, the size of the shadow economy among 28 EU countries has been estimated at the level of 2016 using the MIMIC model. The empirical results revealed as main determinants tax revenues, unemployment rate, active labour market expenditures, social expenditures and the quality of institutions. The empirical evidence highlighted Greece, Cyprus, Bulgaria, Italy, Spain or Romania as the countries with the highest size of the shadow economy, while at opposite side there are United Kingdom, Luxembourg and Austria. After the exercise, it is important to point out that the main causes, the size and the pattern as well as the consequences of this phenomenon are still subject to debate in the literature and the size of the shadow economy remains an open topic of interest and continuous efforts are necessary to improve the understanding of the shadow economy.