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

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  • 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 of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp10705
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    Cited by:

    1. Aziz N. Berdiev & Rajeev K. Goel & James W. Saunoris, 2022. "Do disease epidemics force economic activity underground? International evidence," Contemporary Economic Policy, Western Economic Association International, vol. 40(2), pages 263-282, April.
    2. Omodero Cordelia Onyinyechi, 2019. "The Financial and Economic Implications of Underground Economy: The Nigerian Perspective," Academic Journal of Interdisciplinary Studies, Sciendo, vol. 8(2), pages 155-167, July.
    3. Aziz Berdiev & Rajeev K. Goel & James W. Saunoris, 2020. "International Disease Epidemics and the Shadow Economy," CESifo Working Paper Series 8425, CESifo.
    4. Goel, Rajeev K. & Saunoris, James W. & Schneider, Friedrich, 2019. "Drivers of the underground economy for over a century: A long term look for the United States," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 95-106.
    5. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).
    6. Korhan K. Gokmenoglu & Aysel Amir, 2023. "Investigating the Determinants of the Shadow Economy: The Baltic Region," Eastern European Economics, Taylor & Francis Journals, vol. 61(2), pages 181-198, March.
    7. Hajilee, Massomeh & Stringer, Donna Y. & Hayes, Linda A., 2021. "On the link between the shadow economy and stock market development: An asymmetry analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 303-316.
    8. Fenyvesi, Éva & Vágány, Judit Bernadett, 2020. "A rejtett gazdaság néhány területének szisztematikus szakirodalmi áttekintése [A systematic literature review of some areas of the hidden economy]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 512-532.
    9. Hichem Dkhili & Lassad Ben Dhiab, 2018. "The Relationship between Economic Freedom and FDI versus Economic Growth: Evidence from the GCC Countries," JRFM, MDPI, vol. 11(4), pages 1-17, November.
    10. Caro, Paolo Di & Sacchi, Agnese, 2020. "The heterogeneous effects of labor informality on VAT revenues: Evidence on a developed country," Journal of Macroeconomics, Elsevier, vol. 63(C).
    11. K K C Sineth Kannangara & Yanrui Wu, 2023. "Shadow Economy in Sri Lanka: A Review and New Estimates," Economics Discussion / Working Papers 23-04, The University of Western Australia, Department of Economics.

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    More about this item

    Keywords

    United States; shadow economy; economic growth; time series;
    All these keywords.

    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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