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

18 Pages Posted: 30 Nov 2018

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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Date Written: January 2019

Abstract

Taking a long‐term look at U.S. economic growth over 1870–2014, this paper focuses on the spillovers from the shadow or the unofficial economy to growth in the official sector. 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 neoclassical 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 World War II (WWII) the shadow economy had a negative effect on economic growth; however, post‐WWII the shadow economy was beneficial for growth. The sanding effect of the shadow economy in the earlier period is especially robust to alternate considerations of possible endogeneity and an alternate set of growth determinants.

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 (January 2019). Contemporary Economic Policy, Vol. 37, Issue 1, pp. 50-67, 2019. Available at SSRN: https://ssrn.com/abstract=3293198 or http://dx.doi.org/10.1111/coep.12288

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)

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Germany

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