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Informal and underground economy

Bruno Frey () and Friedrich Schneider ()

No 2000-04, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: There is a widespread feeling that a substantial and increasing share of activities take place outside the official economy. This holds, in particular, for developing and transition but also for high income economies. Such activities are unrecorded by the system of national income accounting, which has become the accepted standard in all countries of the world. The existence and increase of an underground economy gives rise to three major sets of concerns. The economic and social conditions of individuals, household and countries are evaluated in a biased way if one relies on the official statistics. Thus, the official number of unemployed persons may hide that an (unknown) share of them actually work and receive wage income. As a consequence, the macro economic policies are likely to be too expansionary and social policy too excessive. A second concern is the loss of tax revenue as underground activities escape taxation. A third concern interprets the underground economy as an indicator of an unhealthy state between citizens and government. The taxpayers are dissatisfied with what public services they get for their contributions and seek to restress the balance by evading to the underground economy. It is feared that such reaction makes government unable to finance the public goods necessary for an economy and society. In contrast, opponents of government welcome such a development.

Date: 2000-02
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