Firstly, we use the _<u>estimation of shadow production as percentage share on official GDP</u>_ of countries. The source of the data is research of Schneider et al. (2010), who provide a unique database of the size and trends in the shadow economies of 162 countries between 1999 and 2006/2007. The estimations are based on a Multiple Indicators Multiple Causes (MIMIC) model approach.<sup>9</sup> The clear advantage of this dataset is the unified methodology and a broad sample. Many other studies also use this data (see e.g. Loayza et al., 2005, Perry et al., 2007). Besides stating the share of shadow economy output on overall official output of the economy, this indicator estimates the share of employment in the informal sector as well under the assumption that the trends in productivity of informal labor track the similar development as the productivity of formal labor force. Still, this model approach also has considerable shortcomings and the data should be considered with caution. The main concern about this approach is the theoretical background of relation between the shadow economy and its indicators and question of causality that might be subject to discussion. Nevertheless, although some other approaches may give a different picture about the situation in shadow economy, we believe that the unified methodology offers an opportunity to consistently study the differences among countries and development in time. For comparison of estimation by different methods see Schneider and Enste (2000).

As the second set of indicators we utilize _<u>shadow employment as the share of labor force in</u> - -_ _<u>unregulated self and wage employment</u>_ . To estimate this variable we have four proxies with different data sources coming from the Eurostat. Firstly, we use one indicator from the household survey European Union-Statistics on Income and Living Conditions (EU-SILC), stating the share of labor force not contributing to pension system (both private and public) adjusted for the unemployment rate.<sup>10</sup> Yet, this variable is available for 2007 only and offers a very rough picture of shadow employment. Also the reliability of the information is questionable.<sup>11</sup> Moreover, comparison of this variable with previously mentioned indicator of shadow production uncovers substantial differences between these two data sets. As described in Annex 1, ranking of countries changes substantially when ordered according to values of these variables.<sup>12</sup> Secondly, based on the Labor Force Survey (LFS) we use three proxies of shadow employment. Two of them indicate the share of labor force working in small firms with less than ten employees and the share of self-employed. Both these groups are supposed to be more exposed to shadow employment (Perry et al., 2007); however, the link need not be as straightforward and need not be of the same intensity in all the countries. Again, these variables are available for 2006-2007 only. The last proxy from the Eurostat consolidated LFS we use states "workers without a contract" as the share of labor force. For our country sample, the variable is available in longer time series since 2001. The shortcoming of this proxy is that Eurostat adds up all workers who are on temporary legal contracts and workers with no written contract, all together.<sup>13</sup> That means, this group covers both those who are indeed employed in the shadow economy, and those who are employed legally, but on a temporary

> 9 For details on the methodology used, see Schneider et al. (2010).

> 10 The adjustment for the unemployment rate makes this variable methodologically comparable to the other indicators on shadow employment that we use in our analysis. Furthermore, this approach of course represents an implicit assumption that the unemployed are not primarily considered to be engaged in the informal sector.

> 11 Some cases needed to be deleted due to evident inconsistencies regarding development in time or comparison with similar countries.

> 12 Comparison of values of these two indicators per se is not possible given the different nature of data and different methodology.

> 13 OECD (2002) shows that temporary employment is concentrated in groups of younger and less educated workers, workers employed in low-skill occupations, agriculture and small firms. These are also categories more prone to informal behavior.

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