Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/246595 
Year of Publication: 
2021
Series/Report no.: 
GLO Discussion Paper No. 983
Publisher: 
Global Labor Organization (GLO), Essen
Abstract: 
The relationship between shadow economy (or informal economy) and development has been extensively researched. But there is a lack of consensus on how institutional quality affects the size of informal economy in any country. Using the Kuznets Curve hypothesis we assess the relationship between institutional quality and the size of SE for a group of Latin American and Eurozone countries for 1991-2015. We examine the rationale of the 'exclusion' and 'escape' theories in short and long-run with the multiple indicators multiple causes (MIMIC) model. We use two techniques, namely an instrumental variable (IV) and Fully Modified OLS (FMOLS) approach. The results show positive and a significant relationship between labour productivity and the size of the shadow economy. We also find that the size of the informal sector is related to the institutional framework, and while the size of the informal sector varies across countries, both formal and informal sectors can co-exist in the long run. High corruption together with an excessive tax burden and adverse socio-economic conditions impact the size of the informal sector in an economy.
Subjects: 
Shadow Economy
informal sector
development
cointegration
causality
JEL: 
O17
O40
O43
C23
C26
Document Type: 
Working Paper

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