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

Author

Listed:
  • Goel, Rajeev K.

    () (Illinois State University)

  • Saunoris, James W.

    () (Eastern Michigan University)

  • Schneider, Friedrich

    () (University of Linz)

Abstract

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.

Suggested Citation

  • Goel, Rajeev K. & Saunoris, James W. & Schneider, Friedrich, 2017. "Growth in the Shadows: Effect of the Shadow Economy on U.S. Economic Growth over More Than a Century," IZA Discussion Papers 10705, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp10705
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    economic growth; shadow economy; United States; time series;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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