Underground Economy, Evasion and Inequality

Abstract

Economic theory is paying increasing attention to a non-observed economy (NOE) and its causes. Recently, a couple of works (Rosser et al., 2000, 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 that 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.Underground economy, inequality, tax evasion,

Inequality, Informality, and Credit Market Imperfections

“…12. This result confirms, with a different economic motivation, Valentini's (2009) conclusion regarding the indefiniteness of the sign of the correlation between inequality and informality. Valentini argues that there is no reason to suppose that an increase in unrecorded income is uniform along the income distribution.…”

“…This result confirms, with a different economic motivation,Valentini's (2009) conclusion about the indefiniteness of the sign of correlation between inequality and informality. In fact,Valentini (2009) argues that there are no reasons to suppose that a growth in unrecorded income is uniform along income distribution. In particular, the sign of this correlation depends on the predominant nature of the informal income, i.e., if the informal income is higher for poorer individuals, a positive relationship could exist between the size of informality and income inequality, or vice versa.…”

Inequality and informality in transition and emerging countries

“…The very presence of an informal economy biases this type of data, which is typically used to calculate aggregate inequality indexes, because unrecorded income may not be uniform across the income distribution spectrum [9]. This means that as the share of unrecorded income earned by the poor increases, the estimate of income inequality will be more biased (underestimated), and vice versa.…”

“…A further source of bias that undermines the reliability of empirical findings is that income inequality is mainly measured using "declared/regular/formal" incomes [9]. The very presence of an informal economy biases this type of data, which is typically used to calculate aggregate inequality indexes, because unrecorded income may not be uniform across the income distribution spectrum [9].…”

An Empirical Estimation of the Underground Economy in Ghana

“…Rosser et al [42] have also found a positive relationship between income inequality and the size of underground economy. However, the supposed relationship is somewhat disputable, since income inequality is mainly measured using "regular" incomes and this fact could lead to some bias [43].…”