Nonlinearity between the Shadow Economy and Level of Development

30 Pages Posted: 8 Apr 2019

See all articles by Dong Frank Wu

Dong Frank Wu

International Monetary Fund (IMF)

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: March 2019

Abstract

This paper is the first attempt to directly explore the long-run nonlinear relationship between theshadow economy and level of development. Using a dataset of 158 countries over the period from1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy sizeand GDP per capita. Our results imply that the shadow economy tends to increase when economicdevelopment surpasses a given threshold or at least does not disappear. Our findings suggest thatspecial attention should be given to the country's level of development when designing policies totackle issues related to the shadow economy.

Keywords: Shadow economy, National income, Social safety nets, Labor market flexibility, Economic growth, institutional factor, non-institutional, regression, long-run, country group

JEL Classification: E26, H26, O17, O43, I25, E01, E2, E52, O4

Suggested Citation

Frank Wu, Dong and Schneider, Friedrich G., Nonlinearity between the Shadow Economy and Level of Development (March 2019). IMF Working Paper No. 19/48, Available at SSRN: https://ssrn.com/abstract=3367433

Dong Frank Wu (Contact Author)

International Monetary Fund (IMF) ( email )

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Friedrich G. Schneider

Johannes Kepler University Linz - Department of Economics ( email )

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Austria
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+43 732 2468 8208 (Fax)

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

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Institute for the Study of Labor (IZA)

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Germany

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