Shadow Economy: Estimation Methods, Problems, Results and Open questions

Abstract

This paper presents various methods used for estimating the size of the shadow economy. Each method is evaluated and its strengths and weaknesses are discussed, as well as results each method yields. The purpose of the paper is threefold: Firstly, to demonstrate that there is no single infallible method for estimating the size and development of the shadow economy and results can differ significantly between different approaches. The MIMIC approach, discussed in greater detail, is often used due to its flexibility. Secondly, the paper discusses the very definition of the shadow economy and factors contributing to its growth. Finally, latest estimations of the size of the shadow economies of 143 countries over the period 1996 to 2014 are presented. JEL-Classification: D78, E26, H2, H11, H26, K42, O5, O17Keywords: shadow economy estimates, MIMIC approach, methods to estimate the shadow economy, advantages and disadvantages of the methods, MIMIC-method, calibration procedure, light intensity approach IntroductionEmpirical research about the size and development of the shadow economy all over the world has grown rapidly. Nowadays, there are so many studies,1 which use different methods in order to estimate the size and development of the shadow economy, that it is quite difficult to judge the reliability of various methods. Hence, the goal of this paper is to critically review the various methods for estimating the size of the shadow economy and to discuss their strengths and weaknesses. This will enable an interested reader to evaluate the advantages and disadvantages of the different methods.The paper is structured as follows: In the next section some theoretical considerations are presented, starting with a definition of the shadow economy and a brief discussion of its main causes. In section 3 the various measurement methods, as well as their strengths and weaknesses, are described. This section also presents estimates of the size of the shadow economy in Germany using different estimation methods. Section 4 presents some latest developments, new measurement methods, the concept of digital shadow economy, and latest results from 143 countries between 1996 and 2014. Finally, section 5 presents a summary and some concluding remarks.1 See e.g. Feld and Schneider (2010), Gerxhani (2003), Schneider (2015), and Schneider and Williams (2013), Schneider (2016, Schneider (2016), andSauka, Schneider and Defining the shadow economyResearchers attempting to measure the size of shadow economy face the first and difficult question of how to define it.2 One commonly used working definition encompasses all currently unregistered economic activities that would contribute to the officially calculated (or observed) Gross National Product if observed.3 Smith (1994, p. 18) uses the definition "market-based production of goods and services, whether legal or illegal, that escapes detection in the official estimates of GDP." One of the broadest definitions includes "those economic activities and the income derived from them ...

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

“…It can present higher or lower size than the one in Figure 2-see Table C1, Appendix C. From a careful analysis of the series obtained from the four specifications, the NOE presents an upward trend over time, varying between 6% and 13% in 1970 and between 20% and 25% in 2015. The latter evolution is coherent with other author´s results (e.g., Afonso & Gonçalves, 2009Feld & Schneider, 2010;Schneider, 2005;Schneider, 2011Schneider, , 2017; reinforcing the robustness of the estimated results (see Table 1). This expansion is especially notorious for the time horizon 1970-1991.…”

“…Employing microeconomic or microeconometric methods, direct approaches generally use surveys, questionnaires, interviews and tax auditions of firms and/or households in the assessment of the shadow economy (e.g., Isachsen, Klovland, & Strom, 1982;Mogensen, Kvist, Körmendi, & Pedersen, 1995;Zukauskas and Schneider, 2016). Difficulties regarding the sample choice, existence of selection bias, time dimension, measurement errors regarding interviews and surveys are among the main disadvantages of these approaches (e.g., Schneider, 2017;Williams & Schneider, 2016).…”

Regional Estimates of Shadow Economy in Lithuania

“…The MIMIC multiple causes model is considered the most comprehensive methodology developed for estimation of the size of the shadow economy (Schneider & Buehn, 2016;Nchor & Adamec, 2015). In this model, the shadow economy is considered as a latent variable, which, on one side, is related to the set of observed indicators, and on the other sideto the set of causal variables, which have a considerable impact on the multitude of the researched phenomenon.…”

The unobserved economy and the Dutch national accounts after the benchmark revision 2015

“…This was attributed by Feige (1979) to the incompleteness of the statistical information. Since then academia has developed a large number of methods to estimate the missing statistical information (Kazemier, 2006;Schneider and Buehn, 2018), which is referred to in various ways such as hidden economy, underground economy, unrecorded economy, informal economy, etc. The outcome of most academic research was (and still is) that national income and economic growth were strongly underestimated.…”