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Economy

German shadow economy: Small dip before big rise?

A study by a German think tank has warned that the country's shadow economy will expand considerably because of some policy decisions by the grand coalition government. Social contributions and taxes will be crucial.

A study released Tuesday by the Tübingen-based (IAW) suggests that under-the-table work in Germany will experience a further drop in 2014 thanks to decent GDP growth and low unemployment.

The institute estimated that the shadow economy would decrease by some 2 billion euros ($2.7 billion), but would still amount to 338.5 billion euros overall. The think tank based its calculations on an expected expansion of the national economy by 1.7 percent this year.

The IAW also found the drop deceptive insofar as it would be followed by a considerable rise in the coming years as policy decisions taken by Chancellor Angela Merkel's grand coalition of Christian and Social Democrats looked certain to have a deep impact on the labor market.

Dismal long-term outlook

The study specifically mentioned the effect on growing social contributions widening the gap between real and gross incomes. According to the study, the planned rise in nursing insurance premiums and the failure to bring down contributions for the statutory pension system would drive more people back into the shadow economy.

German job market remains stable

Even more importantly, working under the table would experience a boost because of the failure of policymakers to live up to an earlier promise to do away with what had come to be known as "bracket creep" among tax experts.

The term means that people can easily find themselves in a higher tax bracket as a result of income rises designed to offset inflation, with the result being that their real incomes are whittled away and their purchasing power is reduced.

Based on under-the-table work, the IAW survey places Germany midfield among members of the Organisation for Economic Co-operation and Development. Most industrialized nations are expected to see that sector decrease throughout the current year, with the exception of France, where a rise in value-added tax is seen as a driving force behind increased under-the-table work.

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