nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒04‒09
three papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions By Schneider, Friedrich; Buehn, Andreas
  2. Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India By Rahul Anand; Purva Khera
  3. Innovation, Growth and Optimal Monetary Policy By Barbara Annicchiarico; Alessandra Pelloni

  1. By: Schneider, Friedrich (University of Linz); Buehn, Andreas (Institute for Advanced Sustainability Studies (IASS))
    Abstract: This paper presents various methods for estimating the size of the shadow economy and analyzes their strengths and weaknesses. The purpose of the paper is twofold. Firstly, it demonstrates that no ideal method exists to estimate the size and development of the shadow economy. Because of its flexibility, the MIMIC method used to get macro-estimates of the size of the shadow economy is discussed in greater detail. Secondly, the paper focuses on the definition and causal factors of the shadow economy and provides a comparison of the size of the shadow economy using different estimation methods.
    Keywords: MIMIC approach, methods to estimate the shadow economy, advantages and disadvantages of the measurement methods, shadow economy estimates
    JEL: D78 E26 H2 H11 H26 K42 O5 O17
    Date: 2016–03
  2. By: Rahul Anand; Purva Khera
    Abstract: This paper investigates the implications of lowering formal regulations in labor and product markets on informality and macroeconomic outcomes in India. We estimate a DSGE model with an informal sector, and rigidities in the formal labor and product markets. Along with increasing GDP and employment, deregulation also leads to lower informality and greater product market competition. Slow reallocation of resources between the formal and informal sectors leads to some adverse impacts in the short run that can be minimized by implementing a combined package of reforms. These impacts are shown to be greater in an economy with a larger informal sector.
    Keywords: Labor market reforms;India;Labor markets;Products;Unemployment;Informal sector;Hiring;Labor market regulations;structural reforms, product market deregulation, labor market deregulation, unemployment, wage bargaining, informality, DSGE, Indian economy, Bayesian estimation
    Date: 2016–03–02
  3. By: Barbara Annicchiarico (DEF, University of Rome "Tor Vergata"); Alessandra Pelloni (DEF, Università di Roma "Tor Vergata")
    Abstract: This paper studies the effects of several tax reforms in an economy in which taxes are partially evaded by means of undeclared work. To this purpose, we consider a two-sector dynamic general equilibrium model calibrated to Italy which explicitly accounts for underground production. We construct various tax reform scenarios, such as deductibility of labor costs from business tax, ex-ante budget-neutral tax shifts from direct to indirect taxes, and various tax cuts financed by decreases of government spending. We find the following results. First, neglecting the existence of the underground sector may lead to severely miscalculate the macroeconomic impact effects of tax reforms, especially in the short run, where policy interventions produce direct and indirect effects on the markup. Second, partial deductibility of labor costs from the business tax base proves to be highly expansionary and highly detrimental to the size of the underground sector. Third, the dimension of the underground sector is permanently and considerably reduced by changes in the tax mix that diminish the labor tax wedge. Finally, all the considered tax reforms take the public-debt-to-output ratio toward a prolonged downward path.
    Keywords: Endogenous Growth, R&D, Optimal Monetary Policy, Ramsey Problem
    JEL: E32 E52 O42
    Date: 2016–04–01

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