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Mr. Friedrich Schneider and Dominik Enste

economy position producing for the market—regardless of whether they also have officially recorded positions. Some workers in the shadow economy take on second jobs after or even during their regular hours in official employment. Others work only in the shadow economy, either because they find it more profitable to do so or because they are barred from the official economy—as is the case for illegal immigrants, for example. In the European Union in the late 1990s, 20 million people engaged in shadow economy activities. In all European OECD countries combined, about 35

Zsuzsa Munkacsi and Mr. Magnus Saxegaard
This paper explores the macroeconomic impacts of labor and product market deregulation using a small open-economy model with formal and informal markets. We examine both the long-run effects and the transition towards the post-reform equilibrium, while our main focus are reform packages and sequencing. The unofficial sector is a major determinant of the sign, and, in particular, the magnitude of responses. South Africa, an emerging country, is considered when Bayesian estimating the model. Regarding the long run, both labor and product market reforms considerably increase output, although labor market reforms are more successful in decreasing unemployment. Nevertheless, there are short-term costs, for example, a decrease in household consumption, net exports or output, or a decrease in competition. Combining reforms, especially with product market deregulation, are good at reducing short-term costs. Finally, concerning the speed of adjustment, it is usually better to start with a labor market reform.
Mr. Friedrich Schneider and Dominik Enste
This paper presents estimates of the size of the shadow economy in 76 developing, transition, and OECD countries, which are derived by combining figures from different estimation methods. We describe and discuss the strengths and weaknesses of the different estimation methods. We find that the growth of the shadow economy—which is now remarkably large in the 76 countries—is strongly related to increasing burdens of taxation and social security contributions, as well as to the extent of state regulatory activities. Rising corruption also has a clearly positive impact on the growth of the shadow economy.
Zsuzsa Munkacsi and Mr. Magnus Saxegaard

following reasons: 1. to avoid payment of income, value added or other taxes, 2. to avoid payment of social security contributions, 3. to avoid having to meet certain legal labor market standards, such as minimum wages, maximum working hours, safety standards, etc., and 4. to avoid complying with certain administrative obligations, such as completing statistical questionnaires or other administrative forms.” Regarding employment, the “shadow labor market includes all cases, where the employees or the employers, or both, occupy a shadow economy position’’ ( Schneider, 2012

Mr. Friedrich Schneider and Dominik Enste

economy. 20 Moreover, every shadow economic activity involves the labor market to some extent: Hence, the “shadow labor market” includes all cases where the employees or the employers, or both, occupy a “shadow economy position.” This is true regardless of whether such employees or employers also have official (legal) position, as long as the production is for the market. Why do people work in the shadow economy? In the official labor market, the costs that firms (and individuals) have to pay when “officially” hiring someone are tremendously increased by the burden