basis.<sup>14</sup> This variable is clearly also not ideal for the purposes of our analysis, nor are the other shadow employment proxies and we are thus dealing with second- and third-best variables to identify informal workers. Yet, no other official data on shadow employment with a comparable methodology are available. Given the above-mentioned deficiencies of the whole second set of indicators on shadow employment, we will mostly use the first dataset on shadow production estimated by Schneider et al. (2010) further in this section.

Generally, Europe ranks rather low on the informality scale. According to Schneider et al. (2010), the average size of the shadow economy was 34.0% of GDP in eighty-four developing countries in 2007, 32.6% in twenty Eastern European and Central Asian transition countries and 16.6% in twenty-five OECD countries. The respective average for twenty-eight selected European countries examined in this paper was 21.1% in 2007: 25.9% in the NMS group and 17.4% in old European countries. Yet, there still persist large differences among the particular countries.

The heterogeneity in the old European countries group is stable: in period 1999-2007, the variation coefficient hovered around 30% without any clear trend in the old Europe. The heterogeneity of shadow economies in the NMS group was substantially lower throughout the whole examined period with a moderate decreasing trend between 1999 and 2004―variation coefficient fell from 20.4% down to 18.8% and subsequently hovered around 19%. Alongside mild reduction of the heterogeneity within its own respective group, differences between new and old member states have been diminishing only moderately as Table 1 and Figure 1 show: the gap between the average values of these two groups shrank from 9.9 to 8.4 percentage points between 1999 and 2007 with a local peak in 2000 (10.3 percentage points). The share of shadow economy seems to be decreasing in recent years in the entire sample with slightly stronger dynamics registered in the NMS group. Moreover, while the major cuts in shadow production took place at the beginning of the examined period in old European countries, NMS group recorded the largest reductions rather by the end of the period. Overall, the differences between these two groups of countries generally tend to diminish.

Informality was least prevalent in Austria and Luxembourg, where its share on GDP did not exceed 10% in 2005-2007, followed by the Netherlands, France and the United Kingdom (less than 15%) and Ireland and Germany.<sup>15</sup> On the contrary, the highest ratios of shadow economy to official GDP, exceeding 30%, were registered in the NMS group: in Bulgaria, Lithuania, and Romania;<sup>16</sup> Estonia and Latvia managed to cut their shadow production just below this threshold in the examined period. Poland, Malta and Cyprus follow very closely with 26-28%. Yet, issue of large informal sector is not limited to post-transition countries only. **Several old member states (southern European countries–Greece and Italy in particular) also exhibit a large degree of informality. Within the NMS group, the Czech Republic and Slovakia found themselves close to the average of old EU members.**

> 14 The rationale is that "contract" is only for formally contracted employees with an open ended position. This, of course, disregards those who are contracted legally on a temporary or term appointment basis. This limitation might have been overcome with a sort of dummy variable that would control for whether countries allow temporary contracts or not.  However, as indicated by OECD (2002), temporary work is an important feature of the employment legislation in most OECD European countries and, hence, there is no sufficient variation across countries’ labor regulation on this matter for further investigation of this issue.

> 15 In case of Germany, smaller shadow economy was, perhaps surprisingly, documented in the eastern part (Schneider, 2003).

> 16 This situation is confirmed by the European Commission report (EC, 2007), according to which the share of informal economy on the GDP in Bulgaria and Romania was the highest in the group of countries acceding to the EU between 2004 and 2007.

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