The Shadow Economy Declines in Southern Europe

In France, 65% of those who employ maids today pay them on the books – a sharp change from 10 years ago when nearly all maids were a part of the informal economy.

Today, “le travail au noir” (working in the dark or in the black) has declined to about 10% from about 11% of GDP in 2014, according to the Conseil Economique, Social et Environmental. In Italy, the shadow economy has dropped to 19.5% of GDP in 2018, from 22.97% in 2015, according to a study by the consultancy A.T. Kearney. The Italian statistical authority, ISTAT, notes a decline in illegal work since 2017.

In Spain, the shadow economy contracted sharply between 2003 and 2015, dropping to about 18% from nearly 23% of GDP. Portugal saw a drop of the same magnitude for that period.

What drives this decline in the shadow economy in countries where illegal working is socially accepted?

Cultural Change

People work in the shadow economy out of necessity, or because it is culturally accepted. “The informal economy is another safety net for some Italians. The authorities, especially at the local level, are aware of this situation and tolerate — and often encourage — different kinds of evasion and ways to ‘cheat’ the central government. Local political leaders see this as a way to avoid social unrest and sometimes to gain the support of voters,” writes the Stratfor consultancy.

Yet this climate is changing in France, Italy, Spain and Portugal, as Millennials and Gen-Xers feel less secure when they are not within the law.

Millennials in Europe entered the workforce shortly after the dot-com bubble burst, and amid fear of a European equivalent of 9/11, making political as well as financial security highly salient concerns that were also reflected in the labour market at the time,” writes one commentator.

Millennials in Europe are also grounded in the common experience of increasing technological, societal and economic development. What this means is that they trust in the companies they work for, and tend to be conservative about workplaces and the law. Millennials like flexible, innovative work styles, but aren’t comfortable with non-compliance.

“Our data show that Millennials are as likely to believe that employees should comply with authority as older generations.” As the commentator notes, Gen-Xers fit this pattern as well. They, too, grew up in unstable economic periods and adhere to officially recognised ways of working.

Technology supports legal working

The growth of the ICT economy around the world is often blamed as a driver of illegal working. It is true that many businesses operate on the black market over the Net.

Yet a recent study shows that the use of new technology and the Internet is helping to move workers in the shadow economy to the real one. Workers in the informal economy generally find that they need a cell phone. The mobile phone is like an open door to all sorts of services. Most of these services require some form of banking, and that is available to illegal workers, often for the first time.

But the mobile phone does more: It allows illegal workers, who often have limited ability to find work, to connect with potential employers. For example, an illegal worker cited in the study found that he can use the Internet to get merchandise and find the cheapest outlets. Then he uses the Internet to find places where the merchandise is sold.  But, to take advantage of these opportunities, a legal business in some form has to be in place, and so the worker is integrated into the official economy.

No one claims that this kind of integration will take place on a massive scale. Lack of education can still bar the way for many illegal workers. The New York Times recently did a study of illegal work for the Italian fashion industry, and showed how lack of access to the official workplace kept workers in the shadow economy.

Still, the bridge created by new technology is one that an increasing number of illegal workers are crossing to become legitimate. The move has been helped by simplification of the regulations regarding starting a business – this has notably been the case in France and Spain. The 2014 reforms in Italy have also taken a step in this direction.

Repressive measures have been applied to the shadow economy around Europe with limited success. On the other hand, Cultural change, new technology and the gradual automation of most manual labor will do much to reduce the shadow economy.