Economic Audits

LFMI releases study on employment flexibility, 'shadow economy'

LIMS report

The Lithuanian Free Market Institute (LFMI) recently released two studies about the power of free market capitalism in the Baltics and beyond. The first study ranks the employment flexibility of select Baltic, Central, and Eastern European countries. The second examines the nature of illegal trade (also known as “shadow economies”) in six different countries. Each study offers a different perspective but both come to the same conclusion — the freedom to exchange goods and services leads to economic prosperity.

The Employment Flexibility Index 2019 is the second iteration of the index and was the result of collaboration between LFMI, the Institute of Market Economics (of Bulgaria), the Center for Economic and Market Analyses (of the Czech Republic), the Civil Development Forum (of Poland), the Institute of Economic and Social Studies (of Slovakia), and the Estonian Business School (of Estonia). For Lithuania in particular, the 2019 Index represents a validation of free-market principles. The Baltic country jumped from 27 to 15 in flexibility after changes to its financial regulations, which eliminated needless barriers to a variety of employment opportunities.

“Lithuania showed the biggest improvement of all EU and OECD countries, mainly due to the reduction of redundancy costs,” explained Modestas Talačka, a development associate for LFMI. “Lithuania outperformed Estonia in the 28th place and Latvia in the 20th.”

Karolina Mickute, an associate expert at LFMI, further elaborated: “Employment flexibility stimulates overall productivity, employment and labor mobility across sectors allowing the economy to better and faster response to labor market fluctuations … Research shows that the attractiveness of a country’s business environment and the degree of employment flexibility do not necessarily match. Lithuania is among the top ten EU and OECD countries in terms of business competitiveness, while it is ranked 15th by employment flexibility.”

LFMI’s second study examines the number of goods bought and sold outside of government-sanctioned systems in Lithuania, Latvia, Estonia, Poland, the Czech Republic, and Sweden.

Cover of LMFI's report on the shadow economy in Lithuania.

Common terms for these outside operations are “the black market” or, as LFMI refers to them, “the shadow economy” The results of the study reveal that a large number of Lithuanians purchase and sell goods or services illegally.

“Our data confirm that the most common unofficial goods and services have two fundamental features: those are either goods or services that comprise a large share of people’s total consumption, e.g. food or clothing, or highly taxed goods, such as tobacco, alcohol, or fuel,” project research leader Vytautas Žukauskas explained in LFMI’s press release. “A total of 31% of the surveyed population admitted to having unofficially purchased foodstuffs, 28% – clothes, 25% – beauty services, 23%– auto repair services, 17% – cigarettes, 18% – construction and renovation services, and 17% – medicines and food supplements from unofficial sources in the past 12 months.”

Perhaps the most insightful portion of the study comes from the revelation that the majority of the goods bought and sold can be purchased under legal means in the six countries surveyed. The reason they have such a presence in the shadow economy is that the goods are available there without the substantial extra costs imposed by taxes.

“The most important factors of the shadow economy are related to taxation” the press release concluded. “Public perceptions of the reasons behind illicit purchases are similar in all surveyed countries. The high cost of legitimate goods and the price difference between legitimate and illegitimate goods is seen as the main reason for illicit purchases. This was indicated by 89% of respondents in Lithuania, 83% in Estonia, 75% in Latvia, 71% in the Czech Republic, 70% in Poland, and 66% in Sweden. High labor taxation is also considered to the main driver of undeclared work. It was reported by 64% of respondents in the Baltic States, Poland, and the Czech Republic, and 42% of the surveyed in Sweden. These findings are also in line with those of other international studies.”

Both studies reach the same conclusion — uninhibited free markets provide a natural means to prosperity. The first study reveals that the freer a country is the more economic opportunity there will be. The second demonstrates that people will always be drawn to the cheapest methods of purchasing and selling goods, even when that means doing so illegally. Through these findings, the Lithuanian Free Market Institute is continuing to make the case that the path to prosperity for Baltic, Central, and Eastern European countries lies with less government intrusion and more individual freedom.