Evaluating the Magnitude of the Shadow Economy : A Direct Survey Approach

PurposeUntil now, in the absence of direct survey data, economists have had to rely on indirect methods that employ proxy indicators to evaluate the size of the shadow economy. In this paper, however, the results of the first direct survey of business perceptions of the magnitude of the shadow economy are reported. Methodology/approachThis paper reports the results of a UK survey of business perceptions about the prevalence of the shadow economy in their sector, namely the Small Business Service's (SBS) 2004/05 Small Business Survey of 7,505 small businesses. FindingsSome 14 per cent of UK small businesses report that they are negatively affected by the shadow economy, with the average size of shadow work being estimated as 8 per cent of trade in their sector. The sectors identified as most affected by the shadow economy are land transport, construction, the motor vehicle trade, and hotels and restaurants, with new businesses and peripheral regions most affected.Research limitationsThis survey is based on business perceptions of its magnitude in their sector rather than first-hand accounts of the amount of shadow work that businesses conduct. Practical implicationsThese results display that it is wholly possible to conduct more direct surveys on the magnitude of the shadow economy so as to facilitate targeted public policy action.Originality/value of paperThis is the first direct survey in the advanced economies of business perceptions regarding the magnitude of the shadow economy