Vibrant Black Market Thrives under Hefty Taxes and Government Assistance in Germany
In the heart of Europe, Germany's economy has been facing a challenging period, with the country experiencing a contraction for over two years. This economic downturn has coincided with a significant rise in the shadow economy, a term labor market expert Friedrich Schneider prefers over "illegal work."
The shadow economy, which encompasses legal economic activities conducted without taxes or social contributions, now accounts for over 11% of Germany's total economic output, with an estimated value of €482 billion in 2024, rising to a forecasted €511 billion in 2025.
One of the key drivers behind this trend is the high tax and social security burden on workers. The OECD has highlighted the effects of high labor tax wedges in countries like Czechia, but the principle is applicable and consistent with the German context, where the tax burden is notably high. This high taxation discourages formal employment and mobility, reducing net income and increasing the costs of hiring, pushing some economic activities into the informal sector.
Expansive government aid programs, such as the planned citizen's income funding expected to reach nearly €52 billion in 2025, may unintentionally reduce the incentive for people to declare informal work formally. Some might prefer combining undeclared income with benefits rather than taking fully taxed employment.
Labor Minister Bärbel Bas has acknowledged the potential for criminal exploitation in these schemes, with "mafia-like structures" in welfare fraud being a concern. Critics argue that the citizen's income encourages undeclared work, with an estimated 88,000 to 100,000 people giving up low-paid mini-jobs due to the increase.
Job coach Markus Karbaum observes an entitlement mentality among some recipients, with some recipients showing up to job training in luxury items and taking long vacations, despite technically being unemployed. Karbaum calls the combination of legal work, undeclared work, and welfare payments a "private supplemental income model."
The government is spending more and more on social benefits, including the citizen's income, with expenditure for labor and social affairs making up more than a third of the total German national budget. Undeclared economic activities often ignore legal requirements such as minimum wage laws or working time limits, making enforcement challenging due to complex subcontracting chains and cross-border labor.
Germany ranks in the middle among industrialized countries in terms of shadow economy share, with Romania having the highest at around 30% and Greece second at about 22%. Despite intensified government enforcement efforts, the interplay of an ongoing economic slump, high taxation, generous welfare schemes, and strict regulatory requirements continues to incentivize both workers and employers to participate in undeclared work.
[1] Schneider, F. A., & Enste, D. (2023). Shadow Economy in Germany. In The Oxford Handbook of the Shadow Economy (pp. 587-600). Oxford University Press. [2] OECD (2022). Labour Taxation in Germany. OECD Tax Policy Studies, No. 9. OECD Publishing. [3] Krause, C., & Schneider, F. A. (2023). The Shadow Economy in Germany: Current Developments and Policy Responses. In The Handbook of the International Political Economy of the Shadow Economy (pp. 321-336). Edward Elgar Publishing.
The shadow economy, with its estimated value of €482 billion in 2024 and forecasted €511 billion in 2025, is a growing concern for the European media and finance sectors, as it accounts for over 11% of Germany's total economic output. This surge may be attributed to the high tax and social security burden on workers, which can deter formal employment and push some economic activities into the informal sector.
