Estimating the Shadow Economy,
Abstract
In a series of recent articles, Frey and Weck (F-W) attempt to measure the relative sizes of the shadow economy, the part of GNP that escapes measurement as the result of evasion. Their work represents a substantial methodological innovation in research on the shadow economy. They base their approach on factors that they believe affect the size of that economy, rather than employing measures, such as the ratio of currency to demand deposits (Gutmann, 1977) or the ratio of transactions to measured GNP (Feige, 1979), to estimate its magnitude indirectly. While basing estimates of the size of the shadow economy directly on causal variables is a promising approach, Frey and Weck's paper contains three important shortcomings. First, it is too aggregative. Taxes and regulations are very heterogeneous collections of instruments, with widely differing consequences for the size of the shadow economy. Second, inappropriate surrogates are chosen for some of the variables. The result is that the rankings of nations, particularly with respect to tax and regulatory burdens, may be incorrect. Third, the labor force variables should be treated not as causal but as endogenous. For example, a low official labor force participation rate is a consequence, not a cause, of a large shadow economy.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jan 01, 1985
- Accession Number
- ADA154860
Entities
People
- P. Reuter
Organizations
- RAND Corporation