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Growth in the Shadows: Effect of the Shadow Economy on U.S. Economic Growth over More Than a Century

Listed author(s):
  • Goel, Rajeev K.

    ()

    (Illinois State University)

  • Saunoris, James W.

    ()

    (Eastern Michigan University)

  • Schneider, Friedrich

    ()

    (University of Linz)

This paper provides a long-term view by studying the effect of the underground or shadow economy on economic growth in the Unites States over the period 1870 to 2014. Shadow activities might spur or retard economic growth depending on their interactions with the formal sector and impacts on the provision of public goods. Nesting the analysis in a standard neo-classical growth model, we use a relatively new time-series technique to estimate the short-run dynamics and long-run relationship between economic growth and its determinants. Results suggest that prior to WWII the shadow economy had a negative effect on economic growth; however, post-WWII the shadow economy was beneficial for growth. This ambiguity regarding the overall growth impact of the shadow economy is consistent with underlying theoretical arguments.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10705.

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Length: 22 pages
Date of creation: Apr 2017
Handle: RePEc:iza:izadps:dp10705
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  1. McCleary, Rachel & Barro, Robert, 2003. "Religion and Economic Growth across Countries," Scholarly Articles 3708464, Harvard University Department of Economics.
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  7. Fatas, Antonio, 2000. "Do Business Cycles Cast Long Shadows? Short-Run Persistence and Economic Growth," Journal of Economic Growth, Springer, vol. 5(2), pages 147-162, June.
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  18. Friedrich G. Schneider, 2006. "Shadow Economies and Corruption all over the World: What do we really know?," Economics working papers 2006-17, Department of Economics, Johannes Kepler University Linz, Austria.
  19. Michał Jerzmanowski, 2017. "Finance and sources of growth: evidence from the U.S. states," Journal of Economic Growth, Springer, vol. 22(1), pages 97-122, March.
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  24. Panizza, Ugo, 2002. "Income Inequality and Economic Growth: Evidence from American Data," Journal of Economic Growth, Springer, vol. 7(1), pages 25-41, March.
  25. Robert J. Barro, 2003. "Determinants of Economic Growth in a Panel of Countries," Annals of Economics and Finance, Society for AEF, vol. 4(2), pages 231-274, November.
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  29. 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.
  30. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-618, Nov.-Dec..
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