Latvia's shadow economy stuck at a fifth of GDP, new survey shows
A new SSE Riga survey found Latvia's shadow economy stood at 21.8% of GDP last year, with little improvement in recent years unlike Lithuania, where it is shrinking. Envelope wages are a growing concern.
The latest shadow economy survey by the Stockholm School of Economics in Riga (SSE Riga) shows that Latvia's informal economy reached 21.8% of GDP last year. By comparison, Lithuania stood at 23.6% and Estonia at 20.8%. More telling than the single-year figure is the multi-year trend: while Lithuania's shadow economy has been shrinking in recent years and Estonia's has been growing, Latvia has seen no meaningful improvement.
Envelope wages on the rise
Particularly concerning is the resurgence of "envelope wages" — undeclared cash payments that make up nearly half of Latvia's entire shadow economy. Their share of total wage payments has grown from 14.1% in 2019 to 17.8% last year, while the share of informally employed workers has nearly doubled since 2018. A larger take-home sum may seem beneficial to an employee in the short term, but in the long run it means smaller social guarantees, a lower future pension, weaker legal protection in disputes with employers, and difficulties such as securing a mortgage, since banks assess only regular, provable income.
Business environment shapes outcomes
The diverging trends among the Baltic states highlight the role of the business environment. In Lithuania, where economic growth has been faster and business owners rate state support more positively, the share of envelope wages has declined since 2022. In Estonia, where satisfaction with tax policy and administration has fallen, the shadow economy has grown. In Latvia, informal activity is most widespread in construction (29.5%), trade (24.5%) and services (22.3%), meaning uniform solutions across all sectors are unlikely to be effective.
The survey points to examples from other countries: in Finland, households can claim tax relief for certain legally purchased repair and maintenance services, encouraging clients to demand receipts and choose legal providers. In Estonia, small business owners can use a simplified business account where tax is calculated automatically on incoming payments, reducing administrative burden. The conclusion is that curbing the shadow economy requires not only stronger enforcement but also more predictable tax policy, simpler administration, and concrete incentives to operate legally.
