Inequality and Underground Economy: A Not so Easy Relationship

Enzo Valentini

No 283, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: Economic theory is paying increasing attention to non-observed economy (NOE) and its causes. Recently, a couple of works (Rosser et al. 2000, Rosser et al. 2003) have claimed that there is a positive relationship between income inequality and the size of NOE. This supposed relationship is not so clear and deserves in-depth analysis. There is a crucial aspect that has been completely avoided in these studies: income inequality is mainly measured using "regular" incomes and this fact could lead to some bias. The existence of a certain size of NOE implies some income evasion which can affect the inequality indexes used in the study of the relationship between NOE and inequality. Including the regional share of NOE in a wage equation I find that, in the specific case of the Italian private sector employees, the income evasion attached to NOE tends to reduce inequality measured by regular wages statistics.

Keywords: inequality; tax evasion; underground economy (search for similar items in EconPapers)
JEL-codes: H26 I3 (search for similar items in EconPapers)
Pages: 14
Date: 2007-04
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (5)

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