Understanding the informal economy: The influence of political ideology during financial crises

Thanh Cong Nguyen and Thuy Tien Ho

Economic Modelling, 2025, vol. 142, issue C

Abstract: This study investigates both the short- and long-run impact of different types of financial crises on the size of the informal economy, addressing the gap in the crisis-informality relationship. Using a sample of 320 financial crises in 146 countries over the period 1993–2020, we provide evidence that financial crises lead to a persistent increase in the size of the informal economy, confirming that the hidden economy serves as both a safety net for household income and a crisis amplifier. Rising unemployment and prolonged financial crises, especially debt crises, are mechanisms that explain these results. Left-wing governments’ policies, by promoting labour rights and protections, reduce labour market flexibility and consequently expand the informal economy during financial crises. These findings benefit policymakers by offering new insights into the crisis-informality relationship and the influence of political ideology.

Keywords: Financial crisis; Types of financial crises; Informal economy; Political ideology; Left-wing governments (search for similar items in EconPapers)
JEL-codes: D72 G01 O17 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999324002918
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:142:y:2025:i:c:s0264999324002918

DOI: 10.1016/j.econmod.2024.106934

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().