Underground Economy, Irregular Employment and Competitive Conditions of Firms in Italian Regions

In this paper, the main theories on the impact of underground economy are briefly discussed and then verified, through the estimation of an econometric model based on the data resulting from the 20 Italian regions in the years 2000-2005. The differences in the dynamics of regional irregular employment rates are therefore explained by: a) differentials in regional productive systems' prices and competitiveness, i.e., more specifically, the different trend of labour costs for each unit produced and of short-term bank credit cost; b) regional differences in the quality of competitive models, in terms of innovation propensity of firms, therefore in terms of capacity of regional productivity systems to enter developing, high-profitable, markets, avoiding ineffective - on costs' side - competitive models (within which irregular employment is often a way to avoid the payment of fiscal charges and employer's contributions). Furthermore, a competitive model based on innovation and quality requires highlyskilled human capital. Also the quality of social capital is fundamental: the degree of social control, and the attitude towards legality are part of the quality of a local competitive model; c) regional differences in the intensity of recourse to not-negotiated forms of labour flexibility. In low-growing economic systems, like the Mezzogiorno, a high degree of labour flexibility tends to be associated with high work off-the-book rates. The theory according to which high labour irregularity rates are caused by an excessive rigidity in labour markets does not explain the situation of the Mezzogiorno regions. Some policies opposing underground economy are therefore briefly discussed, aimed at creating the legal, economic and social context able to strengthen the potential of economic and occupational growth, within the framework of a highly-quality competitive model.