Explaining and tackling the shadow economy in Estonia, Latvia and Lithuania: a tax morale approach

Figures & data

Figure 1. Acceptability of different types of shadow work in Baltic States, % of respondents.

Figure 2. Acceptability of different types of shadow work, a comparison of average scores for Baltic States and EU28.

Table 1. Tax morale and participation in the shadow economy in Estonia, Latvia and Lithuania: by population group and country.

N = 3036	Tax morality index (where 1 = totally unacceptable and 10 = totally acceptable)	% Engaged in shadow economy	% Of all population engaged in shadow economy	% Of all population	€ Earned in shadow economy (mean)
EU28	2.35	4	–	–	723
All Baltic nations	3.35	9	100	100	659
Shadow work
Yes	4.86	–	–	9	–
No	3.17	–	–	91	–
Gender
Men	3.60	13	65	46	782
Female	3.15	6	35	54	435
Age
15–24	3.53	11	23	19	445
25–34	3.53	13	28	19	1078
35–44	3.60	10	16	14	566
45–54	3.57	10	20	18	407
55–64	2.99	6	8	13	848
65+	2.72	3	5	17	155
Social class
Working class	3.49	10	58	51	500
Middle class	3.21	8	40	47	863
Higher class	2.75	11	2	2	418
Employment
Employed	3.42	11	59	49	604
Unemployed	3.29	7	41	51	745
Area
Rural/village	3.65	10	34	30	535
Small/middle/large town	3.23	9	66	70	723
Country
Latvia	3.98	11	34	28	478
Lithuania	3.16	8	45	54	696
Estonia	2.96	11	21	18	885

Table 2. Logistic regression of participation in shadow economy model.

Dependent variable: engagement in shadow work (undeclared paid activities)	Model 1	Model 2
Tax morale index	0.324*** (0.0309)	0.346*** (0.0328)
Gender (women)
Men	0.730*** (0.146)	0.745*** (0.147)
Age (exact age)	−0.0213*** (0.00444)	−0.0217*** (0.00448)
Social class (working class)
Middle class	−0.218 (0.149)	−0.233 (0.149)
Higher class	0.624 (0.523)	0.571 (0.523)
Employment (unemployed)
Employed	0.325** (0.149)	0.307** (0.150)
Area (rural/village)
Small/middle/large town	−0.0721 (0.154)	−0.0324 (0.156)
Country (Estonia)
Latvia		−0.472***(0.176)
Lithuania		−0.632***(0.189)
Constant	−3.026*** (0.291)	−2.746***(0.307)
N	2471	2471
Pseudo R^2	0.1203	0.1282
Log likelihood	−698.68955	−692.43562
χ^2	178.01	184.09
p>	0.0000	0.0000

Notes: All coefficients are compared to the benchmark category, shown in brackets. The tax morale index used in the regression is calculated at individual level. Significant at *** p < .01, ** p < .05, * p < .1 (robust standard errors in parentheses).

Table 3. Direct and indirect control approaches in work organizations.

Direct control approaches	Indirect control approaches
Close supervision and monitoring of activities	Empowerment and discretion applied to activities
Tight rules	Loose rules
Highly prescribed procedures	Flexible procedures
Centralized structures	Decentralized structures
Low commitment culture	High commitment culture
Low trust culture	High trust culture
Adversarial culture	Culture of mutual interest
A tightly bureaucratic structure and culture	A loosely bureaucratic structure and culture

Source: Derived from Watson (2003, Table 5.2).

Table A1. Variables used in the analysis: definitions and descriptive statistics.

Variables	Definition	Mode or mean	Min/Max
Shadow work (dependent variable)	Dummy variable of shadow work (undeclared paid activities) carried out in the last 12 months	No shadow work (90.47%)	0/1
Tax Morale Index	Constructed index of self-reported tolerance towards shadow work	3.35	1/10
Gender	Dummy for the gender of the respondent	Female (54.40%)	0/1
Age	Respondent age (exact age)	44 years	15/96
Social class	Respondent perception regarding social class to which it belongs in categories	Working class of society (51.10%)	1/3
Employment	Dummy for the employment status of the respondent	Unemployed (50.92%)	0/1
Area respondent lives	Size of the area where the respondent lives in categories	Small or middle sized town (38.03%)	1/3
Country	Respondent country in categories	Lithuania (54.17%)	1/3

Source: Eurobarometer 79.2 (2013): Undeclared Work in the European Union.

Table A2. Two-sample Wilcoxon rank-sum (Mann–Whitney) test.

	Obs.	Rank sum	Expected
People not engaged in undeclared work	2338	2,896,301.5	3,027,710
People engaged in undeclared work	251	456,453.5	325,045
Combined	2589	3,352,755	3,352,755
Unadjusted variance 1.267e+08
Adjustment for ties −3,829,809.5
Adjusted variance 1.228e+08
Ho: Tax morale index of people not engaged in undeclared work = Tax morale index of people engaged in undeclared work
z = −11.857
Prob>|z| = 0.0000

Notes: Tax morality median of people not engaged in undeclared work: 3; tax morality median of people engaged in undeclared work: 5.

Watson, T. J. (2003). Sociology, work and industry. London: Routledge.

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