The Underground Economy in a Matching Model of Endogenous Growth
Department of Economic Sciences, University of Cassino Working Paper 7/2010
31 Pages Posted: 19 Dec 2010
Date Written: December 17, 2010
A matching model will explain both unemployment and economic growth by considering the underground sector. Three problems can thus be simultaneously accounted for: (i) the persistence of underground economy, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. The key assumptions adopted are that entrepreneurial ability is heterogeneous across individuals; skill accumulation determines productivity growth in the regular sector and a positive externality on the underground sector; job-seekers choose whether or not to invest in education and skill depending on the expected wages in the two sectors. The conclusions are that the least able entrepreneurs set up underground firms, employ unskilled labour, and do not contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low. Policies for entrepreneurship and monitoring would help both economic growth and employment.
Keywords: entrepreneurship, underground economy, shadow economy, unemployment, human capital, endogenous growth, matching models
JEL Classification: E26, J23, J24, J63, J64, L26, O40
Suggested Citation: Suggested Citation