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The shadow economy is defined as: "Illicit economic activity existing alongside a country's official economy." It plays a major role in many countries as people evade taxes and regulations by employing people illegally.
The shadow economy has implications that extend beyond the economy to the political order, writes Dominik H. Enste. It is not solely an economic problem but rather requires country-specific analysis of causes and consequences in order to develop policy measures appropriate to each country. "Organized crime, corruption, and illegal employment should nevertheless be fought through stricter controls and enforcement," Enste adds.
According to Melanie Khamis, who examines the formalization of jobs and firms in emerging market economies through registration reform, "Informal firms make up a major share of the economy in most developing countries. Expanding formalization could increase government tax revenues, boost firm profits and national income, and increase employee well-being by improving access to social security and health and workers’ benefits."
Read Domink H. Enste's full article: The shadow economy in industrial countries
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