Abstract
This paper analyzes the role of labor market institutions in explaining developments of shadow economies in European countries. We use several alternative measures of the shadow sector, and we examine effects of labor institutions on shadow sector in two specific regions: new and old European Union member countries, as their respective shadow sectors exhibited a different development in the last decade.
In our paper, we estimate effects of labor market institutions on two sets of shadow economy indicators―shadow production and shadow employment. Comparing alternative measures of the shadow sector allows more granulated analysis of the labor market institutions effects.