countries as it is being processed and published by Eurostat is a serious obstacle in examining this issue.

Despite giving more consistent and robust results, the three models (Model 1, 2 and 5) have also substantial shortcomings as was discussed in previous sections. Generally, the robustness of the results is partially limited by the character of data available. Still, no better indicators are recently available and our results do allow us to claim that the development of shadow sector in European countries in period 2000-2007 was significantly affected by the development of labor market institutional environment. While the effect of some institutions proved to be straightforward and corresponds with our initial hypotheses based on previous theoretical and empirical research, some of the variables showed a rather ambiguous impact.

Our results confirm economic theory and previous empirical analyses that stricter employment protection legislation tends to stimulate shadow production and employment. The EPL coefficient is the most consistent across the models and sub-samples and indicates that countries with stricter legislation that makes labor markets more rigid and cumbersome will indeed end up with a larger shadow sector, no matter how measured.

Effects of other variables are less unambiguous and statistically robust. The higher trade union density effect is not clear, as the sign of the regression coefficient differs across models and samples. Theoretically, both negative and positive effects of trade unionization might be justified. The negative influence of unions on shadow employment may reflect their strength in preventing more flexible forms of employment to be offered by firms, while the positive effect would be consistent with the ―insider vs. outsider‖ arguments: unionized labor fights to keep expensive benefits and tends to increase labor costs, that makes it difficult for employers to offer formal employment. Our empirical results do not provide a robust answer to this dilemma.

Similarly, larger passive labor market policy expenditure has an ambiguous effect on shadow production and tends to increase shadow employment. Effects of the active labor market policy expenditures are almost opposite to the passive ones. They tend to reduce shadow employment in general and in the old European sample in particular, but the NMS group seems to register an opposite direction of this effect. The effect on shadow production is, again, ambiguous. The positive effect of labor market policies in general might be determined by potential inefficiency in their provision, enabling people and firms to simultaneously take part in the programs and engage in informal activities as well. In contrast, negative impact on reducing shadow economy might stem from improved efficiency of labor market functioning and better job-matching process.

Minimum wage also exhibited ambiguous impact on shadow economic activities in our estimations. Generally, negative influence on shadow production tends to prevail, but robustness of this finding is limited by significantly positive effect on shadow employment registered in the NMS group. Theoretically, positive effect on shadow employment would be expected driven by adverse effects of the minimum wage in terms of formal employment potential of low-productivity workers. Yet, the negative effect on shadow production might result from its potential pressure towards productivity increases in the formal sector covered by the minimum wage.

Last of the labor market institutional variables, taxation of labor, proved to have a significant negative impact on shadow employment. The counterintuitive negative result was also reported in several previous studies on shadow economy using comparable tax variables (for a 27