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Grey Matters: Charting the Development of the Shadow Economy

Author

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  • Donal Mac Géidigh
  • Friedrich Schneider
  • Matthias Blum

Abstract

The shadow economy has long been an area of research for policymakers. The determinants of underground activity of late have been identified as high tax burdens and increased regulation, but has this relationship always existed? This seminal work examines the shadow economy in Norway, Sweden, the United Kingdom and the United States over the past 145 (from 1870 to 2015) years using the Currency Demand Approach and finds that the underground economy is stabilising. To our knowledge this is the first attempt to estimate the size and development of the shadow economy over such a long period and due to this we get some new insights. Our results clearly show that the shadow economy in earlier times was considerably higher than in the last 50 years. This paper also analyses whether a plateau has been reached and questions what efforts could be made to further reduce this informal economy.

Suggested Citation

  • Donal Mac Géidigh & Friedrich Schneider & Matthias Blum, 2016. "Grey Matters: Charting the Development of the Shadow Economy," CESifo Working Paper Series 6234, CESifo.
    • Handle: RePEc:ces:ceswps:_6234
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    Cited by:

    1. Nedra Baklouti & Younes Boujelbene, 2022. "Corruption, Democracy, and Public Debt: a Case of the Arab Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 574-586, March.
    2. Rajeev K. Goel & Rati Ram & Friedrich Schneider & Ashley Potempa, 2020. "International movements of money and men: impact on the informal economy," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(1), pages 179-197, January.
    3. Rajeev K. Goel & James W. Saunoris & Friedrich Schneider, 2019. "Growth In The Shadows: Effect Of The Shadow Economy On U.S. Economic Growth Over More Than A Century," Contemporary Economic Policy, Western Economic Association International, vol. 37(1), pages 50-67, January.
    4. Goel, Rajeev K. & Saunoris, James W. & Schneider, Friedrich, 2019. "Drivers of the underground economy for over a century: A long term look for the United States," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 95-106.
    5. Marshall, Emily C. & Saunoris, James & Solis-Garcia, Mario & Do, Trang, 2023. "Measuring the size and dynamics of U.S. state-level shadow economies using a dynamic general equilibrium model with trends," Journal of Macroeconomics, Elsevier, vol. 75(C).

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    More about this item

    Keywords

    shadow economy; underground activity; historical tax rates;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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