Evaluating the magnitude of the shadow economy: a direct survey approach

Until now, in the absence of direct survey data, economists have had to rely on indirect methods that employ proxy indicators to evaluate the size of the shadow economy. The purpose of this paper is to report the results of the first direct survey of business perceptions of the magnitude of the shadow economy.

This paper reports the results of a UK survey of business perceptions about the prevalence of the shadow economy in their sector, namely the Small Business Service's 2004/2005 Small Business Survey of 7,505 small businesses.

Some 14 per cent of UK small businesses report that they are negatively affected by the shadow economy, with the average size of shadow work being estimated as 8 per cent of trade in their sector. The sectors identified as most affected by the shadow economy are land transport, construction, the motor vehicle trade, and hotels and restaurants, with new businesses and peripheral regions most affected.

This survey is based on business perceptions of its magnitude in their sector rather than first‐hand accounts of the amount of shadow work that businesses conduct.

These results display that it is wholly possible to conduct more direct surveys on the magnitude of the shadow economy so as to facilitate targeted public policy action.

This is the first direct survey in the advanced economies of business perceptions regarding the magnitude of the shadow economy.