Black Markets

High Taxes Drive Shadow Economy in Nordic Welfare States

Not hard to figure out


About half of Danes said they'd paid for undocumented labor in the previous year in a confidential survey, and a full 80% said they would be comfortable doing so. Around 50% of German construction workers have done shadow work. In 2007–the last year for which data for all of the following countries is available–the undocumented trade accounted for 18% of GDP in Norway, 17.9% in Sweden, 17.0% in Finland, and 15.3% of GDP in Germany. By contrast, the shadow economy accounted for 12.2% and 8.4% of UK and US GDP that year, respectively.

So why all this off-the-books activity in northern Europe, where workers enjoy low overall unemployment rates and a bunch of social benefits? It's especially surprising when you consider that those benefits are so good that everyone wants a job, so there's virtually no incentive for an individual to work entirely off the books. In Nordic countries, "although the unemployed constitute 4 per cent of the surveyed population, they conduct just 3 per cent of all undeclared work and receive just 2 per cent of all undeclared income," the study's authors, Friedrich Schneider and Colin C. Williams, write.

However, those benefits come with a price tag. Once you have health and social security from the state, working more won't get you more health and social security. But it will mean you pay a higher rate of tax as your income rises. So you have an incentive not to declare all your income.