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

Read further articles on the shadow economy:

• Defining informality vs mitigating its negative effects by Elizabeth Ruppert Bulmer

• Does increasing the minimum wage reduce poverty in developing countries? by T. H. Gindling

• Formalization of jobs and firms in emerging market economies through registration reform by Melanie Khamis 

• Environmental regulations and labor markets (Deutsch) by Olivier Deschenes

• Taxpayer effects of immigration (Deutsch) by James P. Smith

Visit the IZA World of Labor site for more concise, informative, evidence-based articles across the spectrum of labor economics.

All newly published one-pagers are also available to read and download in German. Find out more.

The Brexit referendum in the UK and the 2016 US presidential election brought a significant amount of immigrant resentment to the fore in countries that many deem to be quite immigrant friendly. With these surprising developments, the impacts, contributions, and achievements of immigrants became a matter of fundamental debate.  

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