Determinants of shadow economy: evidence from Germany / Nur Juliana Al-Junit

Shadow economy or also known as hidden economy has grown immensely all over the world and it exists alongside the official economy. The fact that this economy exists under 'shadow', the government has overlooked this problem. It is identified as a threat to a country as it undeniably has diverse impacts on the country in so many aspects. This research aims to identify the factors that influence the size of shadow economy. The researcher has specifically made a study on Germany which contains 33 observations beginning from 1983 to 2015 annually. The data is taken from secondary data sources which then are analysed to obtain the empirical results. The independent variables are tax burden, unemployment rate and self-employment rate. Several tests have been done to ensure the fulfilment of the underlying assumptions. The findings have found that all variables have significant relationship with the size of shadow economy. Based on the empirical results, the tax burden and unemployment rate are found to be positively related to size of shadow economy whilst the self-employment rate is found to be contravened with the expected sign as it is found to be negatively related with the size of shadow economy. The researcher has reached to a conclusion on this topic and has provided several recommendations to reduce the size of shadow economy.