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Shadow Activity and Unemployment in a Depressed Labor Market

  • Tito Boeri
  • Pietro Garibaldi

This paper studies the border between shadow employment and unemployment, and argues that the two macroeconomic phenomena are two faces of the same coin, in the sense that any policy aimed at reducing the former will increase the latter. Theoretically, it proposes and solves a matching model of the labor market, where shadow employment emerges in equilibrium as the endogenous response of firms and workers who fell overburdened by taxes and regulations. While the model we propose neatly rationalize the labor 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. Empirically, the paper uses matched records across LFSs (Labor Force Survey) to assess whether turnover over shadow employment is more stagnant in the high unemployment region of the Italian Mezzogiorno. Since existing estimates of shadow employment are silent on labor market flows and on the relation between shadow activity and main labor 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.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 177.

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Handle: RePEc:igi:igierp:177
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  1. 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.
  2. Saint-Paul, Gilles, 1992. "The High Unemployment Trap," CEPR Discussion Papers 670, C.E.P.R. Discussion Papers.
  3. Pietro Garibaldi, 1998. "Search Unemployment with Advance Notice," IMF Working Papers 98/119, International Monetary Fund.
  4. Dixon, Huw, 1999. "Controversy: On the Use of the 'Hidden Economy' Estimates," Economic Journal, Royal Economic Society, vol. 109(456), pages F335-37, June.
  5. Kolm, A.S. & Larsen, B., 2001. "Wages, Unemployment, and the Underground Economy," Papers 2001:08, Uppsala - Working Paper Series.
  6. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-36.
  7. 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.
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