Driving forces of informal labour supply and demand in Germany

• Author: Stefan JENEWEIN,Florian WAKOLBINGER,Friedrich SCHNEIDER,Stefan D. HAIGNER
• DOI: http://doi.org/10.1111/j.1564-913X.2013.00191.x
• Published date: 01 December 2013
• Date: 01 December 2013

International Labour Review, Vol. 152 (2013), No. 3–4

Copyright © The authors 2013

Journal compilation © International Labour Organization 2013

Driving forces of informal labour supply

and demand in Germany

Stefan D. HAIGNER,* Stefan JENEWEIN,* Friedrich SCHNEIDER**

and Florian WAKOLBINGER***

Abstract. The authors empirically investigate people’s reasons for supplying or

using informal labour, on the basis of data obtained from a 2010 survey of Ger-

man residents. Building on existing research, they nd that being unemployed, or

having been unemployed in the past, signicantly increases the probability of sup-

plying informal labour. In addition, dissatisfaction with one’s relative standing in

society, and annoyance at government inefciency, both have a signicant positive

effect on male informal labour supply. Informal labour demand, however, is not

affected by these factors.

Informal labour supply and demand (i.e. shadow economic activity) are

ubiquitous and of interest to researchers and policy-makers primarily for

two reasons. On the one hand, the shadow economy harms society, in that gov-

ernment revenue is reduced through tax evasion and resources are wasted on

both the detection and concealment of informal labour (Bayer, 2006). On the

other, it spurs economic growth by generating value added and resources that

can be invested in the formal economy. In order to arrive at the best possible

trade-off between the two, knowing about the size and determinants of, and

reasons for, shadow economic activity is of paramount importance.

In contrast to the vast body of literature that measures shadow eco-

nomic activity using indirect methods such as monetary or discrepancy ap-

proaches (see Schneider and Enste, 2000 or Feld and Schneider, 2010), we

investigate people’s individual reasons for supplying or using informal la-

bour, on the basis of data obtained from a 2010 survey of German residents

carried out by the international social/market analysis rm IMAS for the

* Gesellschaft für Angewandte Wirtschaftsforschung mbH and University of Innsbruck,

emails: haigner@gaw-mbh.at and jenewein@gaw-mbh.at. ** University of Linz and Gesellschaft

für Angewandte Wirtschaftsforschung mbH, email: friedrich.schneider@jku.at. *** Correspond-

ing author: Gesellschaft für Angewandte Wirtschaftsforschung mbH and University of Linz, email:

wakolbinger@gaw-mbh.at. The authors wish to thank Götz Werner, who nanced the survey on

which this article is based. They also acknowledge the helpful comments made by participants in

the 2011 annual meeting of the European Public Choice Society.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

International Labour Review508

purposes of a study on unconditional basic income (Gesellschaft für Ange-

wandte Wirtschaftsforschung mbH, 2010). In particular, we focus on whether

a person is, has been, or is afraid of becoming, unemployed; how satised they

are with their relative standing in society; and how inefcient, bureaucratic and

wasteful of tax revenue they perceive German public institutions to be. To the

best of our knowledge, this type of analysis is new.

By analysing individual expectations and perceptions, we look at issues

that have as yet been unexplored, thereby complementing existing research,

which has largely focused on the inuence of tax and social security contribu-

tions, severity of regulations, quality of institutions and tax morale. In this art-

icle, we dene “shadow economic activity” and “informal labour supply and

demand” as the market-based production/consumption of licit goods and ser-

vices that is deliberately concealed from public authorities in order to avoid

the payment of taxes and social security contributions and/or the “red tape”

bound up with formal labour supply and demand (e.g. legal standards, safety

standards and inexibility).

The remainder of the article is organized into four main sections. The

rst reviews earlier research, develops a number of research hypotheses and

describes the survey and the data set. The second section presents the descrip-

tive statistics, while the third reports our regression results. The fourth section

summarizes our conclusions.

Research background, hypotheses and data

Earlier research

While recent research shows that informal labour supply and demand have de-

creased since 2008 as a result of economic recovery from the crisis, estimations

for 2013 show that the informal economy still accounts, on average, for about

18.5 per cent of ofcial GDP.1 The gure is below average in Germany (13 per

cent), the Netherlands (9.1 per cent) and France (9.9 per cent), but it exceeds

the average in Romania (28.4 per cent), Turkey (26.5 per cent), Greece (23.6 per

cent) and Italy (21.1 per cent). In general, the size of the shadow economy in-

creases from North to South and from West to East (Schneider, 2013).

With respect to the relative importance of the determinants of informal

labour supply and demand, indirect estimation methods reveal that indirect

taxation, self-employment, unemployment and income taxes are the most im-

portant driving forces, accounting for average impacts of 29.4 per cent, 22.2 per

cent, 16.9 per cent and 13.1 per cent, repectively (Bühn and Schneider, 2012).

Other research focuses on the effects of moral concerns. Tax morale is shown

to depend negatively on a person’s estimate of how many of his or her com-

patriots cheat on taxes if they have the opportunity (Frey and Torgler, 2007;

Feld and Larsen, 2012). Such evidence from the eld has been corroborated

1 Average gure based on 31 European countries (Schneider, 2013).