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

22 Pages Posted: 1 May 2017

See all articles by Rajeev K. Goel

Rajeev K. Goel

Illinois State University - Department of Economics

James W. Saunoris

Eastern Michigan University

Friedrich Schneider

Johannes Kepler University Linz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)

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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.

Keywords: economic growth, shadow economy, United States, time series

JEL Classification: E26, O43, O51, K42

Suggested Citation

Goel, Rajeev K. and Saunoris, James W. and Schneider, Friedrich G., Growth in the Shadows: Effect of the Shadow Economy on U.S. Economic Growth Over More than a Century. IZA Discussion Paper No. 10705. Available at SSRN: https://ssrn.com/abstract=2960494

Rajeev K. Goel (Contact Author)

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

James W. Saunoris

Eastern Michigan University ( email )

Eastern Michigan University
Ypsilanti, MI 48197
United States

Friedrich G. Schneider

Johannes Kepler University Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz, 4040
Austria
+43 732 2468 8210 (Phone)
+43 732 2468 8208 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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