Source: Data from Table 1 The probability of shadow employment estimated according to the basic definition is, by design, strongly dependent on the form of contract declared by the respondent in LFS. It significantly increases if the declared employment contract is fixed term. The share of such contracts in Poland was strongly increasing in years 2003-2006 whereas in 2007-2008 it started to stabilize and then decrease. The measured average probability of shadow employment tends to follow the same path.

It seems that both of these trends are related to the general developments in the Polish labor market. One has to remember that in 2003 the unemployment rate in Poland was very high reaching on average 19.5%. Then it started to decrease slowly reaching 17.8% in 2005 and 13.8% in 2004. Then the pace of unemployment rate decrease accelerated even further falling to only 7.1% in 2008. It seems that the sharp increase of the number of fixed term contracts was one of the deciding factors in the gradual fall of unemployment rate in Poland between 2003 and 2005. The labor market situation was still difficult and workers were still very likely to accept fixed term jobs. At the same time, companies did not have to compete for workers with better working conditions. After 2006 when the labor market situation started to improve very dynamically, the companies started to offer them better (more stable) working conditions and workers were more reluctant to accept fixed term jobs. It is logical to assume that similar patterns of behavior exist also in shadow employment which by most of related literature is assessed as counter-cyclical.

On the other hand, the shadow employment proxy constructed without the contract variable does not have any explanatory variable. It shows that as unemployment was falling, more people with low employability started to get jobs. Additionally more jobs were also created in services and construction sectors – traditional hubs of shadow employment. Hence this proxy seems to be naturally ―pro-cyclical‖ – i.e. it increases as the labor demand grows.

It seems that one should have a clear idea what definition of shadow employment and model specification will be used and why. There are strong arguments to use the basic definition and specification, although it results in artificial and excessively strong interdependence between the kind of contract declared by the respondent and shadow employment probability.

One has to take into account that **those without any written contracts are the “core” of shadow employment** – they do not pay any taxes or social contributions and they are not protected by any labor regulations. It means that anyone willing to analyze shadow employment has to take them into account in estimations and hence they have to be classified into some kind of contract as available in LFS database (full/part time, fixed/open term). The kind of contract is also the only information available in the LFS directly related to the concept of shadow employment. It strictly describes the nature of employment in relation to sectors or personal characteristics of the employed.

The contract variable also has strong explanatory power for shadow employment when narrow definitions are used (so our additional reinforcement is not crucial here) and that is why the estimations when narrow definition is used produce more or less similar shadow employment results as the basic version.

Last but not least, significant share (around 17% according to the CASE_2007 survey) of those employed on fixed term basis in Poland do not have the standard employment contract but so called ―civil contracts‖ and their labor relations are not protected by labor law and labor courts. It means that although their contracts are legally binding, officially accepted and