The Minimum Wage Fuels Romania’s Shadow Economy?

  • Adriana Ana Maria Davidescu
  • Friedrich Schneider
Part of the Contributions to Management Science book series (MANAGEMENT SC.)


The recent increases in the minimum wage in Romania represent a popular topic at the national level, which indicated that aggressive increases in the minimum wage could create a competitiveness problem in the context of a relatively high level of informal economic activities. The main objective of this chapter is to measure the effects of the minimum wage on Romanian informal activities based on the sharp increases in the minimum wage observed in the recent periods and the new increase planned by the government in the future using quarterly data for the period 2000–2015. The size of the SE was estimated using the MIMIC model, and the empirical results reveal that unemployment, self-employment, indirect taxation and lack of trust in government can be considered causes of Romanian informality. The empirical results indicate that an increase in the minimum wage can be considered a longterm supporting factor for the shadow economy because it increases informal economic activities, as firms will seek alternative methods of circumventing authorities.



We are grateful to the National Scientific Research Institute for Labour and Social Protection Romania for funding the empirical research within the project PN 16440102 entitled “The impact of labour market institutions on informality. Micro and macro approaches”.


  1. Abowd JM, Kramarz F, Margolis DN (1999) Minimum wages and employment in France and the United States (No. w6996). National Bureau of Economic ResearchGoogle Scholar
  2. Adam AM, Tweneboah G (2009) Foreign direct investment and stock market development: Ghana’s evidence. Int Res J Financ Econ 26:178–185Google Scholar
  3. Anastassiou T, Dritsaki C (2005) Tax revenues and economic growth: an empirical investigation for Greece using causality analysis. J Soc Sci 1(2):99–104Google Scholar
  4. Andreica ME, Cataniciu N (2009) Models of minimum wage impact upon employment in Romania. Revista “Calitatea – Acces la succes”, vol 10, nr. 101 Special, Editura Cibernetica MC, Bucureşti, ISSN 1582-2559. BDI (SCOPUS, EBSCO, CABELL’S, PROQUEST)
  5. Andreica ME, Cristescu A, Pirciog S (2011) Simulation scenarios of employment on the Romanian labor market. In: Proceedings of the 2nd international conference on applied informatics and computing theory, pp 260–264Google Scholar
  6. Betcherman G (2012) Labor market institutions: a review of the literature. World Bank Policy Research Working Paper, 6276Google Scholar
  7. Boeri T, Garibaldi P, Ribeiro M (2011) The lighthouse effect and beyond. Rev Income Wealth 57(S1):S54–S78CrossRefGoogle Scholar
  8. Bhorat H, Kanbur R, Mayet N (2013) The impact of sectoral minimum wage laws on employment, wages, and hours of work in South Africa. IZA J Labor Dev 2(1):1CrossRefGoogle Scholar
  9. Card D, Krueger AB (1995a) Myth and measurement: the new economics of the minimum wage. Princeton University Press, Princeton, pp 1, 6–1, 7Google Scholar
  10. Card D, Krueger AB (1995b) Time-series minimum-wage studies: a meta-analysis. Am Econ Rev 85(2):238–243Google Scholar
  11. Card D, Krueger AB (2000) Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania: reply. Am Econ Rev 90(5):1397–1420CrossRefGoogle Scholar
  12. Carneiro F (2000) Time series evidence on the employment effect of minimum wages in Brazil. Available at SSRN 231875Google Scholar
  13. Carneiro F (2004) Are minimum wages to blame for informality in the labour market? Empirica 31(4):295–306CrossRefGoogle Scholar
  14. Carneiro FG, Corseuil CH (2001) The impact of minimum wage changes on employment and wages in Brazil: evidence from time series and longitudinal dataGoogle Scholar
  15. Carneiro F, Henley A (2001) Modelling formal vs. informal employment and earnings: micro-econometric evidence for Brazil. University of Wales at Aberystwyth Management & Business Working Paper, 2001-15Google Scholar
  16. Comola M, De Mello L (2011) How does decentralized minimum wage setting affect employment and informality? The case of Indonesia. Rev Income Wealth 57(S1):S79–S99CrossRefGoogle Scholar
  17. Currie J, Fallick BC (1996) The minimum wage and the employment of youth: evidence from the Nlsy. J Hum Resour 31:404–428CrossRefGoogle Scholar
  18. Davidescu AA, Strat VA (2015) The relationship between official employment, official unemployment and unofficial employment in Romania. Int J Econ Pract Theories 5(3):181–186Google Scholar
  19. Dell’Anno R (2003) Estimating the shadow economy in Italy: a structural equation approach. Working Paper 2003–7, Department of Economics, University of AarhusGoogle Scholar
  20. Dell’Anno R (2007) The shadow economy in Portugal: an analysis with the MIMIC approach. Appl Econ J 10(2):253–277CrossRefGoogle Scholar
  21. Dell’Anno R, Solomon OH (2007) Shadow economy and unemployment rate in USA: is there a structural relationship? An empirical analysis. Appl Econ 1–19Google Scholar
  22. Dell’Anno R, Gómez-Antonio M, Pardo A (2007) The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empir Econ 33(1):51–84CrossRefGoogle Scholar
  23. Dickens R, Machin S, Manning A (1999) The effects of minimum wages on employment: theory and evidence from Britain. J Labor Econ 17(1):1–22CrossRefGoogle Scholar
  24. Dinkelman T, Ranchhod V (2012) Evidence on the impact of minimum wage laws in an informal sector: domestic workers in South Africa. J Dev Econ 99(1):27–45CrossRefGoogle Scholar
  25. Doornik JA, Hansen H (2008) An omnibus test for univariate and multivariate normality. Oxf Bull Econ Stat 70:927–939CrossRefGoogle Scholar
  26. European Commission (2015) Macroeconomic imbalances Country Report – Romania 2015, Occasional Papers 223, June 2015, ISSN 1725-3209 (online),
  27. Fajnzylber P (2001) Minimum wage effects throughout the wage distribution: evidence from Brazil’s formal and informal sectors. Working Paper Series 151, Centro de Desenvolvimento e Planejamento Regional, Belo Horizonte, BrazilGoogle Scholar
  28. Fialová K, Schneider O (2011) Labor institutions and their impact on shadow economies in Europe. World Bank Policy Research Working Paper SeriesGoogle Scholar
  29. Giles DEA, Tedds LM (2002) Taxes and the Canadian underground economy. Canadian Tax paper n.106. Canadian Tax Foundation. TorontoGoogle Scholar
  30. Gindling TH, Terrell K (2002) The effects of minimum wages on the formal and informal sector: evidence from Costa Rica. Unpublished PaperGoogle Scholar
  31. Gindling TH, Terrell K (2005) The effect of minimum wages on actual wages in formal and informal sectors in Costa Rica. World Dev Elsevier 33:1905–1921CrossRefGoogle Scholar
  32. Gindling TH, Terrell K (2007) The effects of multiple minimum wages throughout the labour market: the case of Costa Rica. Labour Econ 14:485–511CrossRefGoogle Scholar
  33. Hazans M (2011) Informal workers across Europe: evidence from 30 European countries. World Bank Policy Research Working Paper, 5912Google Scholar
  34. Henze N, Zirkler B (1990) A class of invariant consistent tests for multivariate normality. Commun Stat Theory Methods 19:3595–3617CrossRefGoogle Scholar
  35. Hohberg M, Lay J (2015) The impact of minimum wages on informal and formal labor market outcomes: evidence from Indonesia. IZA J Labor Dev 4(1):1CrossRefGoogle Scholar
  36. Johansen S (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59:1551–1580CrossRefGoogle Scholar
  37. Khamis M (2008) Does the minimum wage have a higher impact on the informal than on the formal labor market? Evidence from quasi-experiments. IZA Discussion Papers 3911. Institute for the Study of Labor (IZA), BonnGoogle Scholar
  38. Khamis M (2013) Does the minimum wage have a higher impact on the informal than on the formal labour market? Evidence from quasi-experiments. Appl Econ 45(4):477–495CrossRefGoogle Scholar
  39. Krstić G, Schneider F (2014) Formalizing the shadow economy in Serbia. Springer, Cham. ISBN: 978-3-319-13436-9Google Scholar
  40. Lemos S (2004) The effects of the minimum wage in the formal and informal sectors in Brazil. IZA Discussion Paper No. 1089. BonnGoogle Scholar
  41. Lütkepohl H (2007) New introduction to multiple time series analysis. Springer, New YorkGoogle Scholar
  42. Machin S, Manning A (1994) The effects of the minimum wages on wage dispersion and employment: evidence from the U.K. wage councils. Ind Labor Relat Rev 47(2):319–329CrossRefGoogle Scholar
  43. Magruder JR (2013) Can minimum wages cause a big push? Evidence from Indonesia. J Dev Econ 100(1):48–62CrossRefGoogle Scholar
  44. Maloney WF (1998) Are labor markets in developing countries dualistic? The World Bank, Washington, DCCrossRefGoogle Scholar
  45. Maloney W, Mendez J (2004) Measuring the impact of minimum wages. Evidence from Latin America. In: Law and employment: lessons from Latin America and the Caribbean. University of Chicago Press, Chicago, pp 109–130CrossRefGoogle Scholar
  46. Mardia KV (1970) Measures of multivariate skewness and kurtosis with applications. Biometrika 57:519–530CrossRefGoogle Scholar
  47. Mcintyre F (2002) How does the minimum wage affect market informality in Brazil. Unpublished PaperGoogle Scholar
  48. Mocanu C, Zamfir AM, Lungu E, Militaru E (2012) School-to-work transition of higher education graduates in four Eastern European countries. Maastricht School of Management, Working Paper (2012/15)Google Scholar
  49. Muravyev A, Oshchepkov AY (2013) Minimum wages and labor market outcomes: evidence from the emerging economy of Russia. Higher School of Economics Research Paper No. WP BRP, 29Google Scholar
  50. Neri M (1997) A Efetividade Do Salario Minimo No Brasil: Pobreza, Efeito-Farol E Padroes Regionais. Unpublished PaperGoogle Scholar
  51. Neumark D, Wascher W (1992) Employment effects of minimum and subminimum wages: panel data on state minimum wage laws. Ind Labor Relat Rev 46(1):55–81CrossRefGoogle Scholar
  52. Neumark D, Schweitzer M, Wascher W (2000) The effects of minimum wages throughout the wage distribution (No. w7519). National Bureau of Economic ResearchGoogle Scholar
  53. Packard TG, Koettl J, Montenegro C (2012) In from the shadow: integrating Europe’s informal labor. World BankGoogle Scholar
  54. Pesaran HH, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58(1):17–29CrossRefGoogle Scholar
  55. Popescu ME, Stanilă L, Cristescu A (2015) A gender analysis of the minimum wage effects upon employment in Romania. In: Proceedings of the IE 2015 international conference, pp 444–449. ISSN 2284–7472. BDI (EBSCO, REPEC, CABELL'S, ISI Web of Knowledge)
  56. Pirciog S, Ciuca V, Popescu ME (2015) The net impact of training measures from active labour market programs in Romania–subjective and objective evaluation. Procedia Econ Finance 26:339–344CrossRefGoogle Scholar
  57. Razmi MJ, Falahi MA, Montazeri S (2013) Institutional quality and underground economy of 51 OIC member countries. Universal Journal of Management and Social Sciences, 3Google Scholar
  58. Rei D, Bhattacharya M (2008) The impact of institutions and policy on informal economy in developing countries: an econometric exploration. ILO, GenevaGoogle Scholar
  59. Schneider F (2005) Shadow economies around the world: what do we really know? Eur J Polit Econ 21(3):598–642CrossRefGoogle Scholar
  60. Schneider F, Buehn A, Montenegro CE (2010) New estimates for the shadow economies all over the world. Int Econ J 24(4):443–461CrossRefGoogle Scholar
  61. Tokman VE (2001) Integrating the informal sector in the modernization process. SAiS Rev 21(1):45–60CrossRefGoogle Scholar
  62. Zamfir AM, Maer-Matei MM, Mocanu C (2015) “Skills proficiency and wages in Germany and UK” in The Turkish Online Journal of Educational Technology, July, Special Issue 2 for INTE 2015, pp 487–492. ISSN: 2146-7242Google Scholar

Further Reading

  1. Earnings Database, EurostatGoogle Scholar
  2. Employment and Unemployment database, EurostatGoogle Scholar
  3. Eviews 8.1 softwareGoogle Scholar
  4. ILO, World employment report 2004-05. Employment, productivity and poverty reduction, 2004.
  5. Ministerul Muncii.
  6. Monthly Bulletins of National Bank of Romania, 2000–2015.
  7. Quarterly Government Finance Statistics database, EurostatGoogle Scholar
  8. Quarterly Labor Force Survey database, EurostatGoogle Scholar
  9. Quarterly Monetary and Financial Statistics database, EurostatGoogle Scholar
  10. Quarterly National Accounts database, EurostatGoogle Scholar
  11. Stata 13 softwareGoogle Scholar
  12. Tempo database, National Institute of StatisticsGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Adriana Ana Maria Davidescu
    • 1
    • 2
  • Friedrich Schneider
    • 3
  1. 1.Department of Statistics and EconometricsBucharest University of Economic StudiesBucharestRomania
  2. 2.Department of Labour Market PoliciesNational Scientific Research Institute for Labour and Social ProtectionBucharestRomania
  3. 3.Johannes Kepler University of LinzLinzAustria

Personalised recommendations