An introduction to U. There are many productive activities that are not included in GDP because it only measures output produced and sold in legal markets. It does not include productive activity that does not have a market transaction. Quality of life refers to the amount of fulfillment people have in life.
OECD 14—16 The ranges reflect the different estimation methods used by different sources. Common estimation methods are described later in this booklet.
Table 2 shows average estimates for the three main country groups—developing countries, transition economies, and 21 advanced economies, the last all members of the Organization for Economic Cooperation and Development OECD.
The comparisons among countries remain somewhat crude because they are based on different estimation methods. Developing countries According to a survey conducted in —99 in Africa, Nigeria and Egypt had the largest shadow economies, equivalent to 77 percent and 69 percent of GDP, respectively; South Africa, by contrast, had a shadow economy of only 11 percent of GDP.
In Latin America inthe biggest shadow economy was in Bolivia, at 67 percent of GDP, and the smallest was in Chile, at 19 percent. Transition countries Among the states of the former Soviet Union in —99, Georgia's shadow economy was the largest, at 64 percent of GDP; Russia's was 44 percent of GDP; and Uzbekistan's was the smallest, at 9 percent.
Among the transition countries of central and eastern Europe in the same period, Bulgaria's was the largest, at 34 percent of GDP, and Slovakia's the smallest, at 11 percent. In the middle group were the Scandinavian countries, and at the lower end were the United States and Austria, at 10 percent of GDP, and Switzerland, at 9 percent.
In most transition and all investigated OECD countries, the shadow economy has been growing rapidly. The trend in developing countries as a group cannot be judged accurately, for lack of data.
Shadow economies grew bigger between and in the states of the former Soviet Union—from about a fourth to more than a third of GDP—though in central and eastern European states they remained almost stable at about a fifth of GDP.
Growth has also occurred in countries with smaller shadow economies; in the United States, for example, the shadow economy doubled from 4 percent of GDP in to 9 percent in For the OECD countries, the growth in shadow economies has been fastest in the s: Late in the decade, the shadow economy was still growing in most OECD countries.
Shadow Labor Force Participation in the shadow labor market has also been rising. The shadow labor market includes all cases where employees or employers, or both, hold a shadow economy position producing for the market—regardless of whether they also have officially recorded positions.
Some workers in the shadow economy take on second jobs after or even during their regular hours in official employment. Others work only in the shadow economy, either because they find it more profitable to do so or because they are barred from the official economy—as is the case for illegal immigrants, for example.
In the European Union in the late s, 20 million people engaged in shadow economy activities. In some individual countries, the shadow economy labor force was very large: In many countries, these high shares coexisted with high official rates of unemployment.
In Denmark, for example, the share of the total labor force engaged in the shadow economy doubled in 15 years, from 8 percent in to 15 percent in The pattern was similar in Germany and France: Why Are Shadow Economies Growing?
Countries with relatively low tax rates, fewer laws and regulations, and a well-established rule of law tend to have smaller shadow economies. Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments, combined with rising restrictions in the official labor market.
Wage rates in the official economy also play a role. Taxes and social security contributions Taxes and social security contributions add to the cost of labor in the official economy and hence are key factors driving the growth of the shadow economy.
The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. The difference can be very large; in Germany and Austria, for example, the tax and social security payments by firms and their workers amount to the wages that workers effectively earn.
Since the difference depends broadly on the social security system and the tax regime, these are key determinants of the shadow economy.
Several studies have found strong evidence that the tax regime influences the shadow economy. In Austria, the burden of direct taxes including social security payments has been the biggest influence on the growth of the shadow economy, followed by the number of regulations affecting firms and workers, and the complexity of the tax system.
Other studies show similar results for the Scandinavian countries, Germany, and the United States. In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.
Also in the United States, holding down the top marginal income tax rate may prevent further growth of the shadow economy. A study of Quebec City in Canada shows that people are highly mobile between the official and the shadow economy, and that as net wages in the official economy go up, they work less in the shadow economy.
This study also emphasizes that where people perceive the tax rate as too high, an increase in the marginal tax rate will lead to a decrease in tax revenue. State regulations Government regulations can substantially raise the cost of labor to firms in the official economy. Such regulations include license requirements, labor market regulations, trade barriers, and labor restrictions for foreigners.
Employers in the official economy who shift most of the associated additional costs on to their employees give them a strong incentive to move into the shadow economy.
Several studies show that countries with more regulation of their economies have larger shadow economies. For example, among 84 developing, transition, and advanced economies, a one point increase in a regulation index ranging from 1 to 5 is associated with a 10 percent increase in the shadow economy.A Simple Test of Friedman’s Permanent Income Hypothesis By JOSEPH P.
DEJUANw and JOHN J. SEATERz wUniversity of Waterloo, Ontario zNorth Carolina State University Final version received 8 November Estimates size of shadow economy on basis of the discrepancy between income and expenditure statistics in national accounting or in individual data.
Labor force statistics Estimates growth in shadow economy on basis of decline in labor participation in the official economy, assuming the labor force has a constant participation rate overall.
Simon Smith Kuznets was an American economist and statistician who received the Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development." Kuznets made a decisive contribution to the transformation of economics into an .
An economic impact analysis (EIA) examines the effect of an event on the economy in a specified area, ranging from a single neighborhood to the entire globe. It usually measures changes in business revenue, business profits, personal wages, and/or jobs.
It looks like you've lost connection to our server. Please check your internet connection or reload this page. national income Milton Friedman ( - ) The Revival of the Equation of Exchange -Milton friedman ( - ) the revival of the equation of exchange and the quantity theory of money.
a great economist and a product of his times.