In the shadow of a pandemic: Informality and COVID-19 diffusion in Europe

This article investigates whether the shadow economy influenced the diffusion of COVID-19 during the first wave in Europe. Using a hybrid econometric model and data from 26 European countries, we test the hypothesis that larger informal sectors acted as amplifiers of contagion by weakening compliance with non-pharmaceutical interventions and limiting state enforcement capacity. The results confirm a strong and positive association between shadow economy size and new COVID-19 cases. Each additional 1 % of GDP in the shadow economy corresponds to approximately 0.17 more daily cases per million inhabitants, while an extra 1 % of workforce in the informal sector corresponds to approximately 0.26 more daily cases per million inhabitants. Taken together, the findings suggest that informality constitutes a structural vulnerability for pandemic management, though its impact is mediated by institutional and regional contexts. The broader implication is that the shadow economy can undermine containment policies, even in relatively high-capacity European settings. These results highlight that the costs of informality extend beyond fiscal inefficiency to public health risks, underscoring the importance of long-term strategies that integrate economic formalization, social protection, and institutional trust into pandemic preparedness.