Determinants and Size of the Shadow Economy – A Structural Equation Model

The main objective of this paper is to analyze the determinants of the shadow economy within a coherent Structural Equation Model using a data set of 11 latent variables with 58 indicators from 35 countries. The shadow economy is closely connected to its determinants; a higher wealth and development level, a better administrative system, lower taxes and social security payments and the extent of labor market regulations determine the level of shadow economy. Germany ranks 16th of 35 countries by shadow economy, with a score of 3.6, with the best being New Zealand, 1.0, and the worst Romania, 10.