Structural relationship between under-employment and shadow economy: A theoretical investigation

Abstract

Introduction:

Shadow economy reflects a part of economic activities involving goods and services which are paid by cash but not declared for tax. The affiliation between shadow economy and labour force is vastly discussed upon the relationship with the rate of unemployment and shadow economy (Dell’Anno and Solomon, 2008, Schneider et.al, 2010, Davidescu and Dobre, 2012). However, as mentioned by Sengenberger (2011) “unemployment statistics are often criticized in developed and in developing countries alike - for failing to reflect the ‘true’ extent of the employment problem”, unemployment seems not a border challenge for emerging economies when compared to new challenges occur with underutilization and inefficiency matters of contemporary labor market. The degree of impact from underutilization of labour force to the growth of shadow economy can vary according to the type of economy. Within under developed economies, majority of people who employed are not usually having a wage rate which can fulfill their all needs. Therefore, this may worse with under-employed people. In addition to that people may underemployed within such economies due to lack of job opportunities and vocational skills. Then people with higher educational qualifications also engaged with low grade jobs with lower salaries. This may provide incentives for them to engage in shadow economic activities to earn more. As a result of that study attempts to develop a structural relationship between under-employment and shadow economy. Under-employment reflects a situation where employee works, but not belongs to their actual or exact capacity. Here this ‘capacity’ will identify in different prospects such as underutilization, underestimate or undermine the employee skills and capabilities LFS-Annual report (2014); Walling and Clancy (2010); ADB (2005).