Kulbergs: Rise in Shadow Economy Shows Wrong Direction

The shadow economy in Latvia rose to 21.8% of GDP in 2025, an increase of 0.4 percentage points from the previous year, according to a study by the Sustainable Business Centre at the Riga School of Economics. Prime Minister Andris Kulbergs (AS) called this increase a precise diagnosis that the country is heading in the wrong direction, adding that he believes the actual situation is even more severe.

Kulbergs stated that the problem lies in a system that makes honest entrepreneurs feel unheard. He argued that shadow economy cannot be reduced through tighter controls but by making legal work more profitable than illegal employment. Currently, legal hiring remains too expensive, especially for small businesses, in regions, and for part-time work.

The Prime Minister suggested reviewing the rules on minimum social contributions for people working reduced hours as their sole job. If an employee objectively works part-time, seasonally, or a few days a week, the state should not penalize the employer for formalizing that work. The current regulation, according to Kulberg, forces employers to choose between not hiring or paying part of the salary under the table.

The study also revealed that envelope wages account for the largest share of the shadow economy in Latvia at 47.1%, followed by unreported revenues (25.5%) and unreported employees (27.4%). In comparison, Estonia's shadow economy increased to 20.8% of GDP, while Lithuania's decreased to 23.6%.