The Shadow Economy and A Study of Country Differentiation Subject to the Location and Eurozone Membership

Shadow Economy is one of the most popular subjects in Economic literature. Since it is one of the most important drivers of tax income, it has been numerously studied by many researchers due to its direct impact on the fiscal policy. A very brief definiton of shadow economy is given as follows according to the businessdictionary.com

"the part of an economy involving goods and services which are paid for in cash, and therefore not declared for tax."

In this study, we will try to make simple statistical analyses in order to show whether the size of the shadow economy differs according the location of a country or not. This means that if the country is placed in somewhere in Europe, does it affect the size of the shadow economy?

Afterwards, we have tried to understand if there is a difference between Eurozone countries and the others regarding their shadow economy figures.

The figures of European Countries are as follows. The figures show the share of the shadow economy in the GDP of that country as of year end 2012.

Countries	Shadow Economy	Countries	Shadow Economy	Countries	Shadow Economy
Austria	7,6	Luxemburg	8,2	Hungary	22,5
Belgium	16,8	Malta	25,3	Latvia	26,1
Cyprus	25,6	Netherlands	9,5	Lithuania	28,5
Estonia	28,2	Portugal	19,4	Poland	24,4
Finland	13,3	Slovenia	23,6	Romania	29,1
France	10,8	Spain	19,2	Sweden	14,3
Germany	13,3	Slovakia	15,5	United Kingdom	10,1
Greece	24,0	Bulgaria	31,9	Turkey	27,5
Ireland	12,7	Czech Republic	16,0
Italy	21,6	Denmark	13,4

For the first analysis we have made a t-test (unequal variances assumed) in order to understand whether there is a difference between the East European countries and the others. The results of the test is given below. Since p-value for two tail is very close to 0%, we can say that there is a significant difference between Europe and East Europe Countries.

t-Test: Unequal Variances Assumed
	Europe	East Europe
Mean	15,59	24,85
Variance	35,27	27,39
n	17	11
Mean Difference	0
df	23
t Stat	-4,33
P(T<=t) single-tail	0,00
t critical single-tail	1,71
P(T<=t) two-tail	0,00
t critical two-tail	2,07

For the second analysis we have made another t-test (unequal variances assumed) in order to understand whether there is a difference between the Eurozone countries and the others. The results of the test is given below. Since p-value for two tail is very close to 10%, we can say that there is not a significant difference between Europe and East Europe Countries.

t-Test: Unequal Variances Assumed
	Eurozone	Non Eurozone
Mean	17,33	22,16
Variance	43,71	55,43
n	17	11
Mean Difference	0
df	20
t Stat	-1,75
P(T<=t) single-tail	0,05
t critical single-tail	1,72
P(T<=t) two-tail	0,10
t critical two-tail	2,09

As a result, the Euro zone countries were not able to implement more registered economy compared to the others in Europe. However, the shadow economy is seen to be worse when the location of the country gets more Eastern in Europe.