The Anatomy of the Underground Economy

Abstract

The “underground economy” literature has generated a plethora of vague terms (shadow, hidden, subterranean) that have served to confuse rather than clarify the substantive issues raised by the finding that significant segments of economic activity may be imperfectly accounted for in the conventional data bases that form the foundation of empirical inquiry in economics. This paper outlines a taxonomic framework that clarifies the distinction between “unrecorded” and “unreported” economic activities and examines the appropriate empirical counterparts of these concepts. All too often, the under-recording of income in National Income and Product Accounts has been confused with the under reporting of income on tax forms. The concept of a “full compliance deficit” is introduced in order to distinguish between structural, cyclical and compliance components of budget deficit measures.

Keywords: underground economy, shadow economy, unreported economy, full compliance deficit

JEL Classification: O17, H26, H2, K42, D72, H3