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Shadow Activity and Unemployment in a Depressed Labour Market

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  • Boeri, Tito
  • Garibaldi, Pietro

Abstract

This Paper studies the border between shadow employment and unemployment. It argues that the two macroeconomic phenomena are two faces of the same coin: any policy aimed at reducing the former will increase the latter. Theoretically, it proposes and solves a matching model of the labour market, where shadow employment emerges in equilibrium as the endogenous response of firms and workers who felt overburdened by taxes and regulations. While the model we propose neatly rationalizes the labour market trade-off implied by ‘shadow reducing policies’, it suggests that economies with low unemployment turnover should be characterized also by low turnover along the shadow margins. Since existing estimates of shadow employment are silent on labour market flows and on the relation between shadow activity and the main labour market aggregates, we perform original empirical work on the border between employment, unemployment and inactivity, and we find that Italian shadow employment has longer duration in regions with lower unemployment turnover. We also find support to the substantive assumptions of the model.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3433.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3433

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Keywords: matching; shadow activity; unemployment;

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  1. Saint-Paul, G., 1991. "The High Unemployment Trap," DELTA Working Papers 91-01, DELTA (Ecole normale supérieure).
  2. Tito Boeri & Axel Börsch-Supan & Guido Tabellini, 2001. "Would you like to shrink the welfare state? A survey of European citizens," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 7-50, 04.
  3. Garibaldi, Pietro, 1999. "Search Unemployment with Advance Notice," CEPR Discussion Papers 2164, C.E.P.R. Discussion Papers.
  4. Kolm, A.S. & Larsen, B., 2001. "Wages, Unemployment, and the Underground Economy," Papers 2001:08, Uppsala - Working Paper Series.
  5. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-36.
  6. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  7. Dixon, Huw, 1999. "Controversy: On the Use of the 'Hidden Economy' Estimates," Economic Journal, Royal Economic Society, vol. 109(456), pages F335-37, June.
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  1. El Plan contra la economía sumergida: ¿Es una buena idea?
    by Florentino Felgueroso in Nada Es Gratis on 2011-04-18 00:18:47
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