Modeling the structural relationship between the underemployment and shadow economy

Abstract

The degree of impact from underutilization of the labor force to the growth of the shadow economy can vary according to the type of economy. Within underdeveloped economies, the majority who employed are not usually having a wage that can fulfill their needs. Even due to the job-skill mismatch, people with higher educational qualifications are also underutilized. This provides incentives for them to engage in the shadow economy (Samaranayake & Dayaratne- Banda, 2015; Balkouti & Boujelbne, 2018).

This study attempts to develop a structural relationship between the rate of underemployment and the shadow economy. Accordingly, the theoretical derivation was led by two landmark research done by Hall (1979) and Dell’Anno & Solomon (2008). Hall (1979) focused on the duration of employment as long as both employers and employees care about it. Dell’Anno & Solomon (2008) had derived a structural relationship between the shadow economy and the rate of unemployment by adopting the Hall’s (1979) model. Accordingly, this study intends to extend the development by Dell’Anno & Solomon (2008) and introduced “the rate of underemployment” as a new-fangled proxy.