Reflections on the Meaning and Measurement of Unobserved Economies: What Do We Really Know About the 'Shadow Economy'?

Abstract

This paper reviews the meaning and measurement of unobserved economies germane to tax evasion and macroeconomic information systems. These include the unreported, non-observed, underground, illegal, informal and unrecorded economies. It reviews the progress and shortcomings of national and international agency efforts to measure these unobserved economies, noting what they have in common, what distinguishes one from another and their interconnections. It then examines the meaning of Professor Schneider's Shadow Economy (SSE), and the veracity of his claim to have accurately estimated its size and trend worldwide by employing a MIMIC model methodology. It concludes that SSE estimates suffer from conceptual flaws, apparent manipulation of results and insufficient documentation for replication, questioning their place in the academic, policy and popular literature.JEL classification: E26, O17, H26, E41, C51, C82, K42.

A Righteous Undocumented Economy

“…To date, some researchers have framed informal economies as illegitimate entities because they have been presumed to exist mainly to evade taxes or avoid compliance with employment and other laws (Bovi and Dell'Anno 2009;Feige 2016;Ghersi 1997;Mirus et al 1994). Other scholars have excluded illegal activities from their conceptualizations of the informal economy (Webb et al 2009), focused on the subsistence and household production components (Petersen et al 2010), and studied how informal elements support the formal economy (Darbi et al 2016).…”

“…Most of the literature on the informal economy has used terms like black market and hidden, underground, illegal, parallel, irregular, and shadow economy when describing those economic systems (Feige 2016;Fortin et al 2010;Schneider et al 2010Schneider et al , 2015. Some of those works, primarily from accounting, tax, and macro-economics journals, dwell on the disreputable elements of informal economies, mainly tax evasion, criminal activity, and labor standards violations.…”

The Non‐Observed Economy in Portugal: The monetary model and the MIMIC model

“…However, it has some drawbacks as the possible overestimation of the shadow economy. Other concerns have been exposed by looking at the MIMIC approach and its applications (e.g., Bajada & Schneider, 2005;Breusch, 2016;Dell'Anno & Schneider, 2003;Feige, 2016;Hashimzade & Heady, 2016;Hassen et al, 2016;Schneider, 2016). As stated by Breusch (2005b) one of the most prominent critics of the MIMIC approach, the sensitivity to the change of units of measurement must be considered, since different results can be obtained by measuring the variables in different units.…”

On Estimating the Size of the Shadow Economy

“…13. See also the critiques of Feige (2015) and Slemrod and Weber (2012) The model estimates of the black economy are by construction linear combinations of the explanatory variables and an error term. It is obvious that none of these explanatory variables can be employed in other models to test their impact on the black economy whenever the dependent variable comes from the model approach.…”