Shadow Employment in Transition - A Matter of Choice or No Choice?

Shadow employment may follow from two main labour market failures. In the first, official market labour taxation distortions make it ineffective for some agents to engage in registered employment due to a tax wedge, which makes the revenues from unofficial employment higher than the corresponding official ones (tax evasion hypothesis). The alternative explanation draws to labour market tightness - for workers regular employment may be unattainable, which results in seeking earning opportunities beyond the boundaries of the official labour market (market segmentation hypothesis). We use a unique data set from a survey on undeclared employment. Using propensity score matching and decomposition techniques we demonstrate that workers of the shadow economy are characterized by slightly higher endowments, while their revenues are considerably lower than among the matched official economy counterparts. Although unobservable heterogeneity is considerable, results are robust and point to social exclusion and the market segmentation hypothesis.