Shadow Economy Index for the Baltic Countries
The aim of the SSE Riga “Shadow Economy Index for the Baltic Countries” is to measure the size of the shadow economies in Latvia, Lithuania and Estonia, as well as to explore the main factors that influence participation in the shadow economy. The Index is measured annually since 2009.
On 30 May 2023, the annual SSE Riga "Shadow Economy Index in the Baltic States" results were announced. The latest data reveals that the shadow economy in Latvia for 2022 has remained almost at the same level as in 2021, constituting 26.5% of GDP, with a decrease of only 0.1 percentage points. Meanwhile, Estonia experienced a relatively more notable reduction in its shadow economy, while Lithuania observed an increase.
Estonia has a relatively larger reduction in the size of the shadow economy in 2022: by 1.0 percentage point compared to 2021, reaching 18.0% of GDP. While in Lithuania, the size of the shadow economy has increased by 2.7 percentage points in 2022 and reaches 25.8% of GDP. In Lithuania, this is the highest level of the shadow economy since 2009, when the shadow economy study was launched in the Baltic states. Overall, the latest study results indicate that the size of the shadow economy in Lithuania has approached the level of the shadow economy in Latvia, while in Estonia the size of the shadow economy is significantly smaller.
SSE Riga professor, Dr Arnis Sauka, the author of the study, points out: “For more than a decade, we have been developing the Shadow Economy Index for the Baltic states, and we emphasise the importance of a smart and comprehensive approach to reducing the shadow economy, for example, by ensuring coordination between different ministries and institutions under their authority, data exchange and interoperability, as well as the ability to find newer, more advanced solutions to tackle the shadow economy. We have also underlined that the shadow economy cannot be reduced by repressive methods alone. In particular, although it is more complex and may take more time, policy makers still need to invest much more effort to encourage entrepreneurs to pay taxes voluntarily, for example, by the policy makers themselves demonstrating more efficient use of taxes in the interests of entrepreneurs and wider society, as well as by more transparent operations of state and local authorities, for example without the shadow of corruption. We should also continue to work to ensure that corruption and other economic crimes are dealt with more fairly and more swiftly in the eyes of the public, as well as to work on a more business-friendly, predictable business environment, including tax policy. Otherwise, I see no reason why the shadow economy in Latvia should decrease in the coming years.”
The study results show that in Latvia and Estonia the most important component of the shadow economy in 2022 was envelope wages, which account for 46.7% of the total shadow economy in Latvia, while in Estonia it is 44.5%. In 2022, undeclared income made up 29.0% of the total shadow economy in Latvia, and undeclared employees accounted for 24.3%. Unreported employees in Estonia, in 2022, account for 28.0% of the total shadow economy, but unreported earnings – 27.5%. While in Lithuania, in 2022, the most significant component of the shadow economy was undeclared earnings at 36.5% of the total shadow economy, followed by envelope wages at 34.0% and unreported employees at 29.5%.
In 2022 compared to 2021 in Latvia the share of average wages (%) that companies hide from the state, or “envelope wages”, increased by 1.2 percentage points to 25.0%.
This is the highest level of envelope wages in Latvia since 2013. An even higher increase in envelope wages in 2022 is expected in Lithuania, where they have increased by 3.8% to 20.0 percentage points compared to 2021. While in Estonia, the level of envelope wages has declined slightly in 2022 – by 0.2 percentage points and reach 16.8%. Thus, the amount of envelope wages is still significantly larger in Latvia, largely explaining the differences in the overall size of the shadow economy, especially between Latvia and Estonia.
The brochure of the study is available below.
Additionally, the video recording of the annual SSE Riga "Shadow Economy Index in the Baltic States" presentation, followed by a discussion among experts and entrepreneurs, is now available for viewing. The recording took place on May 30, 2023 and the event was organized in cooperation with the Latvian Chamber of Commerce and Industry (LCCI).
We acknowledge the financial support provided for the Shadow Economy Index study by the British Embassy in Latvia and SOCnet.