Attempting to measure the size of a shadow economy is a very difficult and challenging task. This chapter is a comprehensive overview of the current data on the various measures used to estimate the shadow economy. The following three methods are especially useful to measure its size and development.

Direct approaches

These are micro-economic approaches, employing either well-designed surveys and samples based on voluntary replies, or tax auditing and other compliance methods. Sample surveys designed to estimate the size of the shadow economy are widely used in a number of countries to measure underground activities. The major disadvantage of this type of method is commonplace: both average precision and results depend upon the cooperation of the individuals questioned. Direct questionnaires reveal little about increases in undeclared work because many interviewees are hesitant to confess fraudulent behaviour. The responses are, therefore, rarely reliable. Hence, it is difficult to make a proper monetary estimation of the extent of illicit work. Nevertheless, surveys can provide detailed information about the structure of the shadow economy.

The shadow economy can also be estimated by determining the discrepancy between income declared for tax purposes and actual earnings through the use of selective audits. In this regard, fiscal auditing programmes have been particularly effective. Such programmes, designed to measure the amount of undeclared taxable income, have been employed in several countries to estimate the shadow economy.