Shadow Economies: Size, Causes, and Consequences

Abstract

Using various methods, the size of the shadow economy in 76 developing, transition, and OECD countries is estimated. Average size varies from 12 percent of GDP for OECD countries, to 23 percent for transition countries and 39 percent for developing countries. Increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy, especially in OECD countries. According to some findings, corruption has a positive impact on the size of the shadow economy, and a growing shadow economy has a negative effect on official GDP growth.

Shadow economies around the world: what do we really know?

“…Although quite a large literature 1) on single aspects of the hidden or shadow economy exists and a comprehensive survey has been written by Schneider (the author of this paper) and Enste (2000), the subject is still quite controversial 2) as there are disagreements about the definition of shadow economy activities, the estimation procedures and the use of their estimates in economic analysis and policy aspects. 3) Nevertheless around the world, there are some indications for an increase of the shadow economy but little is known about the development and the size of the shadow economies in transition, development and developed countries over the period 1990 to 2000.…”

The impact of tax morale and institutional quality on the shadow economy

“…The transformation of the socialist economies was one of the main reasons for this surge in interest since institutional weaknesses and corruption surfaced as major obstacles to market reforms (Abed and Gupta, 2002). Moreover, the increased interest and new datasets contributed to a rapidly growing empirical literature on illegal activities such as shadow economy or corruption (see Schneider and Enste 2000, Treisman 2000and Lambsdorff 1999 for reviews).…”

Comparative analysis of labor market dynamics using Markov processes: An application to informality

“…3 This is, in fact, an extreme stylization although its essential focus on the dualism of the labor market and the intrinsic inferiority of informality is common to many models. See Schneider and Enste (2000) for a more comprehensive review of existing views. A rich theoretical literature is emerging that poses more sophisticated mechanisms that relate informality to unemployment.…”