Drivers of the Underground Economy Around the Millienium: A Long Term Look for the United States

24 Pages Posted: 10 Jul 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)

Abstract

This paper provides a long term analysis of the determinants of the shadow economy. Using data for the United States over the years 1870–2014 we examine economic and political factors driving the underground sector. Results show that among the economic factors, greater economic prosperity increased the shadow sector, while greater openness to trade and a bigger government reduced it, with the effects of inflation being statistically insignificant. Politically, the efficacy of presidential vetoes and the effect of congressional party homogeneity are statistically insignificant. Further, the U.S. shadow economy increased during both world wars, but was lower during the great depression. However, in the short run, the relationship between the shadow economy and its determinants exhibit some remarkable differences.

Keywords: shadow economy, underground economy, determinants, taxation, inflation, openness, world war, great depression

JEL Classification: H26, K42

Suggested Citation

Goel, Rajeev K. and Saunoris, James W. and Schneider, Friedrich G., Drivers of the Underground Economy Around the Millienium: A Long Term Look for the United States. IZA Discussion Paper No. 10857. Available at SSRN: https://ssrn.com/abstract=2998966

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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