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Government interventions and the size of the informal economy. The case of Iran (1971–2007)

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  • Abbas Khandan
  • Masoud Nili

Abstract

Literature on the informal economy can mainly be divided into two different contrasting theories. According to the dual labor market theory (DLM), which considers the informal economy as a spare sector providing jobs for formally unemployed resources, unpleasant economic situations force people to act informally. Legalists, on the other hand, blame government interventions such as minimum wages or price control policies for pushing rent-seeking firms toward the shadows. This study using an Error-correction Multi-Indicators Multi-Causes (EMIMIC) model, a systematic method consisting of structural and measurement equations, shows that these two theories are complementary rather than substitutes for one another. While long-term trends are explained by legalists, DLM theory is also suitable for explaining short term changes. Iran’s economy in the period 1971–2007, which was characterized by government interventions, is chosen for this purpose. These interventions are measured by Principal Component Analysis. Finally, an index of the size of Iran’s informal economy is also reported.

Suggested Citation

  • Abbas Khandan & Masoud Nili, 2014. "Government interventions and the size of the informal economy. The case of Iran (1971–2007)," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 17(1), pages 71-90, January.
    • Handle: RePEc:taf:jecprf:v:17:y:2014:i:1:p:71-90
    DOI: 10.1080/17487870.2013.780396
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    Cited by:

    1. Zhenji Jin & Yue Shang & Jian Xu, 2018. "The Impact of Government Subsidies on Private R&D and Firm Performance: Does Ownership Matter in China’s Manufacturing Industry?," Sustainability, MDPI, vol. 10(7), pages 1-20, June.
    2. Elham Taheri & Fatma Güven Lisaniler & Cem Payaslioğlu, 2021. "Female Labour Force Participation: What Prevents Sustainable Development Goals from Being Realised in Iran?," Sustainability, MDPI, vol. 13(21), pages 1-17, October.

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