Namely, about a third (32%) of the surveyed Latvian citizens said that there are people in their circle of friends or acquaintances who either work without an employment contract or have received “envelope wages” within the past 12 months. The same answer was given by a slightly smaller number of Lithuanians (30%) and Estonians (25%) versus only 7% of Swedes. According to Prof. Sauka, “The good news regarding Latvia is that the situation is improving: a study of identical methodology carried out in 2015 revealed that the reported number of friends and acquaintances was 4% higher: 36%.” The study results also show that Latvians mostly engage in this kind of shadow economy through the construction industry. Most respondents (22%) say that the range of monthly “envelope wages” is EUR 301–500, 19% say EUR 101–300, but 13% of respondents say up to EUR 100.

According to the study results, more than half of the surveyed Latvian citizens (52% in 2018 and 57% in 2015) admit to buying goods or services without a receipt but from a legal seller within the last 12 months, i. e., being aware or under the impression that the sales proceeds are not being declared. In Lithuania, this figure is higher: 59%, while in Estonia it is considerably lower: 36%. Whereas in Sweden it is 27% (2018 data). In all three Baltic countries, 4–5% of respondents reported that they do so regularly (at least 10 times a month). Whereas, an average of 4 out of 10 respondents in Latvia said that they have bought goods within the past 12 months while being aware that the seller is illegal (not registered or similar). In Lithuania, this number is smaller: 35%, in Estonia: 28%, but in Sweden: 14% of respondents (2018 data). The study shows that the goods most commonly bought from illegal sellers in Latvia are clothing (28%), food (25%), healthcare, beauty and massage services (24%), cigarettes (22%) and car repair services (18%).

The study also reveals that 37% of the surveyed Latvian citizens admit to buying illegal cigarettes (43% in Lithuania, 33% in Estonia, 30% in Sweden and 65% (!) in Poland). The survey results show that the average consumption of illegal cigarettes in Latvia is one third (33%) of the total amount of cigarettes purchased. In Lithuania: 36%, in Estonia: 22%. Whereas 28% of the surveyed Latvian citizens admit to buying illegal alcohol, which amounts to an average of 18% of the total alcohol consumption. According to the survey data, illegal alcohol is consumed by 32% of Lithuanians, 35% of Estonians and 33% of Swedes. 31% of Latvian respondents say that they also purchase illegal fuel, which makes up 22% of the total fuel consumption. “Even though the available data show that law enforcement institutions are working very actively and productively towards eliminating this problem, the illegal consumption of excise goods, as supported by previous studies, is still a significant challenge in Latvia, which can be greatly attributed to our geographical location,” says Prof. Sauka.

However, the study showed that on average Latvian citizens spend less on “purchases of an illegal nature” in comparison to the citizens of the other surveyed countries. Namely, Latvians spend an average of EUR 75 a month on illegal purchases, Lithuanians: EUR 80, Estonians: EUR 85, but Swedes: up to EUR 235. “When comparing the 2018 results with the 2015 study data, we can conclude that the amount of money spent on purchases of this nature in Latvia has grown by 32%, in Lithuania by 11% and in Estonia by 32%. Needless to say, the study results clearly show that participation in the shadow economy both in Latvia and its neighbouring countries is still a relatively highly tolerated behaviour, which a large portion of the public supports with their money and purchases,” says Prof. Sauka.

According to the study results, the main motivation behind purchasing goods of illegal origin is the wish to acquire goods or services cheaper (75% of respondents in Latvia, 89% in Lithuania, 83% in Estonia). Furthermore, 40–50% of respondents across all Baltic states claim that people don’t know or don’t care if the goods/services are sold legally or not. Whereas, the most common reason for why citizens engage in labour without contractual relations or partially receive their wage “in an envelope”, is simply wanting to receive a higher salary (59% of respondents in Latvia, 64% in Lithuania, 69% in Estonia).

The second most common reason for why citizens engage in labour without contractual relations or partially receive their wage “in an envelope”, is that citizens often willingly choose to receive their wage “in an envelope”. This answer was given by 34% of the surveyed Latvians, 36% of Lithuanians and 29% of Estonians. According to Prof. Sauka, “The number of respondents who gave the same answer to this question in the 2015 study, was significantly lower in Latvia: 19%. This shows that the problem has intensified in the past 2–3 years, the reason for which is most likely the debt obligations of a considerably large portion of citizens, including so-called quick loans, outstanding alimony payments, etc.”

Another significant reason for engaging in illegal activities on the labour market was that people don’t see the point of paying taxes, because, according to 33% of Latvians, 28% of Lithuanians and 34% of Estonians, the services provided by the government are either bad or insufficient. Sauka points out that “(...) this, of course, is not a good result, but it is better than the situation in 2015, when this answer was given by 51% of Latvians.”

In this regard, respondents were asked to compare the tax burden in Latvia against the amount and quality of services they receive from the government. The evaluation was given on a scale of 1–10, where 10 means that taxes are very high. The average rating of Latvian responders was 6.8. The rating in Estonia and Lithuania was 6.9 and 7.3 respectively. However, about one fourth of Latvian respondents rated the tax burden to government services ratio with a 10, but 10% of respondents, with a 9, indicating that they are paying excessively high taxes for the services received from the government. “In this area, unfortunately, we have regressed, because the average rating in Latvia according to the 2015 study was much better: 4.3 instead of 6.8.” The overall satisfaction with the Latvian government is also very low: the average rating on a scale of 1–10, where 10 means very satisfied, is 3.4 (3.5 in Lithuania, 4 in Estonia, 5.3 in Sweden). The overall satisfaction with the services provided by the government is a little higher in all countries, including Latvia: 4.3 in Latvia, 4.9 in Lithuania, 5.2 in Estonia and 5.8 in Sweden).

Trust in the government and tax collection authorities is closely related to citizens’ overall tolerance towards participation in any kind of shadow economy activities. As per the study results, the attitude of Latvian citizens towards tax fraud is negative rather than positive. Specifically, it was rated as a 6.0 on a scale of 1–10, where 10 means that tax fraud is inexcusable.

Finally, the study results show that two thirds (66%) of Latvian respondents might consider participating (more) in shadow economy if their income were to decrease significantly and their financial standing, decline. The results show that in this situation 51% of Latvians (53% of Lithuanians, 54% of Estonians) would consider the option to receive at least part of their salary “in an envelope”, while 43% would consider purchasing cheaper goods of illegal origin (49% of Lithuanians, 35% of Estonians).

The annual Shadow Economy Index for the Baltic countries, which, unlike this study, is based on the expertise of Latvian entrepreneurs and expresses the shadow economy as a percentage of Latvian, Lithuanian and Estonian gross domestic product, will be presented on 15 May 2019.

About the study:

This study is based on representative surveys of citizens carried out by Springer Research in March–April 2018. A total of 6055 citizens aged 18–75 were surveyed in six countries: Latvia, Lithuania, Estonia, Poland, the Czech Republic and Sweden (an average of 1000 citizens per country).

The methodology of the study was developed by Prof. Arnis Sauka, Prof. Friedrich Schneider and employees of the Lithuanian Free Market Institute. The study was performed in collaboration with researchers in Sweden, Estonia, Poland, the Czech Republic, Lithuania and Latvia. The study was funded through PMI Impact, which is an initiative implemented by Philip Morris International (PMI). In the course of the study, its coordinator the Lithuanian Free Market Institute ensured complete freedom from any potential influence of PMI. The study results and findings are the outcome of the work carried out by the researchers and might not reflect the opinions of PMI.