The nexus between unemployment rate and shadow economy: A comparative analysis of developed and developing countries using a simultaneous-equation model

Marwa Sahnoun and Chokri Abdennadher

No 2019-30, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper studies the effects and causal links between the shadow economy and the unemployment rate using a dynamic simultaneous-equation panel data model for 38 developing and 40 developed countries over the 2000−2015 period. The analysis suggests that there is a unidirectional and negative causality running from the unemployment rate to the shadow economy in the developing countries. However, in the developed countries, there is a bidirectional and negative causal relationship between the shadow economy and unemployment rate. The sensitivity of the results makes the authors realize that institutional quality interacts strongly with the relationship between the shadow economy and the unemployment rate. In countries with a good institutional quality, the unemployment rate is associated with a weak informal economy, whereas in countries with low institutional quality, it strongly drives the informal economy.

Keywords: shadow economy; unemployment rate; institutional quality; dynamic simultaneous-equation panel data models (search for similar items in EconPapers)
JEL-codes: E26 J60 O17 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-iue and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201930

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