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Outside the State: The Shadow Economy and Shadow Economy Labour Force

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The Palgrave Handbook of International Development

Abstract

This chapter focusses on the shadow economy and on work in the shadow. The most influential factors on the shadow economy are tax policies and state regulation. The size of the shadow economy was decreasing over 1999–2007 from 34 % to 31.2 % for 161 countries (unweighted average). Furthermore, economic opportunities, taxes and regulations, the general situation on the labour market, and unemployment are crucial for an understanding of the dynamics of the shadow labour force. Opposite to the decrease of the shadow economy (value-added figures), the shadow economy labour force increased for most countries over the period 1999–2007.

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Notes

  1. 1.

    This paper focusses on the size and development of the shadow economy for uniform countries and not for specific regions. Recently, first studies have been undertaken to measure the size of the shadow economy as well as the ‘grey’ or ‘shadow’ labour force for urban regions or states (e.g. California). See, for example, Marcelli et al. (1999), Marcelli (2004), Chen (2004), Williams and Windebank (1998, 2001a, b), Flaming et al. (2005), Alderslade et al. (2006), Brück et al. (2006). Herwartz et al. (2009) and Tafenau et al. (2010) estimate the size of the shadow economy of 234 EU-NUTS regions for the year 2004 demonstrating a considerable regional variation in the size of the shadow economy.

  2. 2.

    This definition is taken from Dell’Anno (2003), Dell’Anno and Schneider (2004) and Feige (1989); see also Thomas (1999), Fleming et al. (2000) or Feld and Larsen (2005: 25).

  3. 3.

    This indirect approach is based on the assumption that cash is used to make transactions within the shadow economy. By using this method, one econometrically estimates a currency demand function including independent variables like tax burden, regulation and so on, which ‘drive’ the shadow economy. This equation is used to make simulations of the amount of money that would be necessary to generate the official GDP. This amount is then compared with the actual money demand and the difference is treated as an indicator for the development of the shadow economy. On this basis, the calculated difference is multiplied by the velocity of money of the official economy and one gets a value-added figure for the shadow economy. See footnote 11 for references discussing critically this method.

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  1. Johannes Kepler University, Linz, Austria

    Friedrich Schneider

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  1. Friedrich Schneider
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Editors and Affiliations

  1. Department of Politics, University of York, Heslington, United Kingdom

    Jean Grugel

  2. Department of Geography, University of Sheffield, United Kingdom

    Daniel Hammett

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Schneider, F. (2016). Outside the State: The Shadow Economy and Shadow Economy Labour Force. In: Grugel, J., Hammett, D. (eds) The Palgrave Handbook of International Development. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-42724-3_11

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