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Labor market: Share of the shadow economy in Germany is increasing

Labor market: Share of the shadow economy in Germany is increasing

Customs is fighting against increasingly sophisticated methods of the shadow economy, and their share is growing. In an international comparison, Germany is in the middle range when it comes to the increase.

The driver who quickly delivers a few boxes from the furniture store in exchange for cash. The all-rounder who cuts the hedges in summer and earns a few euros. These are common, if small, examples of a phenomenon that has become increasingly important: the shadow economy. In popular parlance: undeclared work. It ranges from hobby gardeners on behalf of neighbors to professional, international gangs, as customs writes in its annual report for 2022.

According to experts, their scope in Germany will continue to increase this year. Overall, the value of services provided illegally through the shadow economy will increase by 38 billion to 481 billion euros, according to an estimate published by Linz professor Friedrich Schneider and his Tübingen colleague Bernhard Boockmann from the Institute for Applied Economic Research.

The share of the forecast shadow economy in gross domestic product will therefore increase to 11.3 percent. After a phase of decline, this has been rising again since 2021 and, according to economists, is likely to reach the 2014 level this year. With an increase of two percentage points in the past five years, Germany is in the midfield internationally. According to the calculations, the Brexit country Great Britain recorded the highest increase of 3.9 percent among 21 selected industrialized countries. Norway came away with an increase of 0.1 percent.

No exact numbers

“We don’t have exact numbers because no one can accurately record undeclared work,” says Schneider. That’s why he and Boockmann have to use statistical tricks. Stressful factors are identified, such as the level of tax pressure or the level of dissatisfaction with the state. They are put in relation to measurable quantities, such as the demand for cash.

The estimate assumes that economic output contracted by 0.6 percent last year and the number of unemployed averaged 2.6 million. An expected inflation rate of 2.7 percent was also included in the calculations. However, according to preliminary data from the Federal Statistical Office, German economic output fell by 0.3 percent after adjusting for prices. And according to previous data, inflation was 5.9 percent in 2023.

The experts expect that the introduction of citizens’ money with an increased standard rate will reduce undeclared work overall. The improved salaries will also mean that some of those receiving citizen’s benefit will have less desire to take up a legal job. However, the effect is that the increased citizen’s allowance payments mean that fewer recipients feel the need to earn money illegally on the side. This means that undeclared work will decrease by 2.4 billion euros as a result of the introduction of citizens’ money.

By returning to the full VAT rate in the catering industry, however, the opposite effect will be achieved. The scientists assume an increase in undeclared work of 1.9 billion euros.

Known tax damage in the millions

Customs is responsible for combating the shadow economy. There, 8,600 investigators are involved in the fight against sometimes sophisticated forms of the illegal economy. Fake self-employment, wage splitting or chain fraud are keywords for popular methods of duping the tax office. The cases discovered alone led to tax damage of 686 million euros in 2022, as customs announced.

At the 300 job centers nationwide in which the Federal Employment Agency is involved, the number of proceedings initiated due to abuse of benefits fell last year: in 2022 there were 119,063 proceedings initiated, then in 2023 104,870. Only some of these fall into the area of ​​the shadow economy , for example when people earn “on the side” in addition to receiving citizen’s money.

Source: Stern

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