Germany's shrinking economy, experiencing its third year of contraction in 2025, is seeing a surge in undeclared work. Labor market expert Friedrich Schneider estimates the shadow economy reached €482 billion ($562 billion) in 2024, exceeding the government budget and marking a near-decade high. He projects a further increase to €511 billion in 2025. Schneider attributes this rise to public perception of high taxes and poor public services, leading to decreased "tax morale" and a form of "tax rebellion." He notes that this isn't large-scale tax evasion but rather individuals supplementing income through activities like private tutoring or off-the-books renovations. The rise also correlates with increased unemployment and reduced work hours, pushing people to seek additional income through undeclared work.

The increase in Germany's "Bürgergeld" (citizen's income) benefit, raised by over 12% on January 1, 2024, is also cited as a contributing factor. Schneider estimates this increase led 88,000 to 100,000 people to leave low-paid jobs, exacerbating labor shortages. Job coach Markus Karbaum highlights a "private supplemental income model" where individuals combine part-time work, undeclared cash income, and citizen's income. He points to instances of apparent welfare fraud, suggesting a need for improved data cross-checking and coordination between agencies. Labor Minister Bärbel Bas acknowledges the potential for criminal exploitation of the citizen's income scheme, referring to "mafia-like structures" involved in welfare fraud.

Schneider concludes that a robust German economy is the most effective way to reduce undeclared work, as such activity tends to decline during economic booms.

Impact Statement: The growth of Germany's shadow economy poses challenges to the government's budget and social welfare programs, highlighting the tension between taxation, public services, and social support initiatives.