Vitalija Gabnytė-Baranauskė

Type of the article: Research Article

Abstract
This study examines the relationship between the Kaitz index (a measure of the minimum wage relative to median earnings) and the size of the shadow economy across selected European countries. The analysis uses Eurostat official statistics for 2018–2022 (panel data). Research investigates whether higher minimum wages, as reflected in the Kaitz index, contribute to labor market distortions, informal employment, and tax evasion. To quantify the shadow economy, we employ the Multiple Indicators Multiple Causes (MIMIC) approach, a method widely used in empirical studies of the shadow economy. The shadow economy level is calculated as the proportion of hidden value added relative to GDP. The results reveal that increases in both the Kaitz index and GDP growth are significantly linked with reductions in the shadow economy, while previous levels of informality contribute to its persistence. These insights highlight the potential of minimum wage regulation and sustained economic growth as tools for reducing informal employment, particularly when supported by strong institutional enforcement. The results indicate a statistically significant relationship between the Kaitz index and the shadow economy share, highlighting implications for wage and labor market policy.