U.S. Shadow Economies: A State-Level Study
Posted: 30 Jan 2013 Last revised: 29 Oct 2015
Date Written: March 1, 2013
Recent studies of shadow economies focus primarily on cross-country comparisons. Few have examined regional or state-level variations in underground economic activity. This paper presents estimates of the shadow economy for 50 U.S. states over the period 1997 to 2008. Results suggest that tax and social welfare burdens, labor market regulations, and intensity of regulation enforcement are important determinants of the underground economy. Among the states, Delaware, on average, maintains the smallest shadow economy at 7.28% of GDP; Oregon, on average, has the second smallest shadow economy at 7.41% of GDP; followed by Colorado, averaging 7.52% of GDP, rounding out the three smallest shadow economies in the U.S. West Virginia and Mississippi, on average, have the largest shadow economies in the U.S. as a percent of GDP (9.32% and 9.54%, respectively).
Keywords: shadow economy, MIMIC model, latent variable, tax burden, regulation, U.S. states
JEL Classification: D78, H11, H2, K42, O17, O51
Suggested Citation: Suggested Citation