Shadow Activity and Unemployment in a Depressed Labour Market

38 Pages Posted: 17 Aug 2002

See all articles by Tito Boeri

Tito Boeri

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Pietro Garibaldi

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: June 2002

Abstract

This Paper studies the border between shadow employment and unemployment. It argues that the two macroeconomic phenomena are two faces of the same coin: any policy aimed at reducing the former will increase the latter. Theoretically, it proposes and solves a matching model of the labour market, where shadow employment emerges in equilibrium as the endogenous response of firms and workers who felt overburdened by taxes and regulations. While the model we propose neatly rationalizes the labour market trade-off implied by 'shadow reducing policies', it suggests that economies with low unemployment turnover should be characterized also by low turnover along the shadow margins. Since existing estimates of shadow employment are silent on labour market flows and on the relation between shadow activity and the main labour market aggregates, we perform original empirical work on the border between employment, unemployment and inactivity, and we find that Italian shadow employment has longer duration in regions with lower unemployment turnover. We also find support to the substantive assumptions of the model.

Keywords: Unemployment, matching, shadow activity

JEL Classification: J30

Suggested Citation

Boeri, Tito and Garibaldi, Pietro, Shadow Activity and Unemployment in a Depressed Labour Market (June 2002). Available at SSRN: https://ssrn.com/abstract=323388

Tito Boeri (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics ( email )

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

Pietro Garibaldi

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5422 (Phone)
+39 02 5836 5343 (Fax)

HOME PAGE: http://www.frdb.org/~pietrogaribaldi/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

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