Unregulated, underground or shadow economic activities create economic inefficiency as they potentially reduce government tax revenue, cause fragmented labor markets and lower potential economic growth. The management and monitoring of the shadow can be directed towards the labor market conditions as both are inter-related. Any activity taking place as part of the shadow economy involves the shadow or informal labor market. Workers may be either excluded from the formal labor market by the lack of opportunities or exit the formal sector voluntarily because of both monetary and non-monetary benefits of being informal. Several factors determine the shadow labor market which include taxation, employment protection legislation, minimum wages, trade unions and labor market policies.

The main questions for policy makers: how serious are the impact of the shadow economy on the Malaysian economy? And how should the Malaysian government deal with this issue? This study addresses the size, causes and consequences of shadow labor market on the Malaysian economy.