A Fifth of Latvia's Economy Still in the Shadows – What's Going Wrong
A new survey shows Latvia's shadow economy reached 21.8% of GDP last year and has barely shrunk in recent years. Experts say enforcement alone isn't enough — legal work also needs to become more rewarding.
The latest shadow economy survey by the Stockholm School of Economics in Riga (SSE Riga) shows that Latvia's shadow economy accounted for 21.8% of GDP last year. By comparison, Lithuania stood at 23.6% and Estonia at 20.8%. More important than the single-year figure is the trend: while Lithuania's shadow economy has been shrinking in recent years and Estonia's has been growing, Latvia's has stayed essentially unchanged.
Raul Eamets, chief economist at Bigbank, notes that the shadow economy is not merely a statistic — it represents uncollected taxes that never reach healthcare, education, and infrastructure, as well as weaker social protections for people paid in envelope wages.
Envelope wages on the rise
Particularly concerning is the spread of envelope wages, which make up nearly half of Latvia's entire shadow economy. Their share of total wage payments has risen from 14.1% in 2019 to 17.8% last year, while the share of informally employed workers has nearly doubled since 2018. In the short term, a larger "cash in hand" sum may look appealing, but in the long run workers themselves lose out — undeclared income means smaller social guarantees, a lower future pension, and weaker protection in disputes with employers, along with reduced ability to borrow, since banks assess only regular, provable income.
Business climate matters
Differing trends across the Baltic states point to the importance of the wider business environment. In Lithuania, where economic growth has been stronger and entrepreneurs have rated government support more positively, the share of envelope wages has fallen since 2022. In Estonia, growing dissatisfaction with tax policy and administration has coincided with a rising shadow economy.
In Latvia, the shadow economy is most widespread in construction (29.5%), trade (24.5%), and services (22.3%). Examples cited from elsewhere include Finland, where households can receive tax relief for certain legally purchased repair and maintenance services, and Estonia's simplified business account for small entrepreneurs, where tax is calculated automatically from income received.
The expert concludes that Latvia needs both stronger enforcement and better incentives, with greater emphasis going forward on predictable tax policy, simpler administration, and concrete incentives to work legally.
