Measuring the size of the shadow economy in 30 provinces of China over 1995–2016: The MIMIC approach

Applying the multiple indicators and multiple causes (MIMIC) approach, the present paper measured the size of the shadow economies in China's provinces over 1995–2016. The results show that the average size of the shadow economy in 30 provinces of China increased from 13.55% in 1995 to 14.39% in 2009, and then decreased to 12.30% in 2016. There are obvious variations in the size of the shadow economies in different districts of China. The average size of the shadow economy is lowest in provinces in the eastern district and highest in the western district. In addition, the causes and consequences of the shadow economies in China's provinces have also been analysed using the MIMIC approach, and the results show that tax burden, complexity of the tax system, intensity of regulation, unemployment, employment in the agricultural sector and economic openness have significant positive effects on China's shadow economy, while the ratio of direct taxes to indirect taxes, fiscal autonomy and income levels have significant negative effects on China's shadow economy. Using the growth rate of energy consumption as the benchmark indicator, the MIMIC analysis shows that the shadow economy has significant positive effects on the development of the official economy and income inequality while having a significant negative effect on the labour participation rate.     

Creating low skilled jobs by subsidizing market-contracted household work

The paper analyses the determinants of household work contracted in the German shadow economy. The German socio-economic household panel, which enumerates casual domestic employment, is used to estimate the demand for such household work. The regressors include regional wage rates, household income and several control variables for household composition. It is found that the demand for household work in the shadow economy is very income elastic. This suggests that targeted wage subsidies, linked to household work agencies, would be very effective in raising the legal demand for domestic help. A wage subsidy of 50% of wage costs could thus establish up to 500?000 new jobs for previously unemployed or non-working low skilled workers. The net fiscal costs of such a scheme are about 6.200 Euro per full-time job. In addition, society benefits from more law enforcement and from a raised female labour supply, especially by highly qualified mothers.     

Overhead labour and feedback effects between capacity utilization and income distribution: estimations for the USA economy

ABSTRACT

Empirical studies on the USA have not reached a consensus on whether its demand is wage- or profit-led, leading many scholars to scrutinize what drives the empirical results. This article tests two possible explanations for profit-led results which are related to the presence of overhead labour. To do so, a vector autoregression model is estimated for the USA from 1964 to 2010 and the wage share is split between supervisors/managers and direct workers. The results support the argument that the income redistribution away from workers and towards managers increased the likelihood of profit-led demand and suggest that an increase in the workers’ share of income would stimulate the economy. Also, increases in capacity utilization negatively affect the supervisors’ share, so that short-run profit-led results may be capturing the cyclical behaviour of the profit share, but the effect becomes positive as time goes by, suggesting a complex determination of functional income distribution, as capacity utilization affects it in ambiguous ways.     

影子工资、影子收入与农户劳动供给——基于四川沐川县、安徽金寨县的调查分析

贫困地区就业的典型特征是自我雇佣,很少从事有酬劳动。如何在没有工资的情况下估计劳动供给行为就成为一个难题。在这种情况下,通过影子工资和影子收入来观察农户及其成员的劳动供给行为,为我们研究农户劳动力配置提供了一个有效的分析工具。本文利用Translog和C—D生产函数对四川省沐川县、安徽金寨县农户在林业、种植业、畜牧业和非农业的影子工资率进行估算,并利用Heckman两阶段模型分析了影子工资率等因素对农户劳动供给的影响,结果表明该地区农户的影子工资与劳动时间之间是负向关系,闲暇对于男性和女性来说是劣质品,家庭劳动供给的联合决策特征非常明显,家庭劳动力存在主次之分,该结论对于说明家庭内劳动分工以及劳动力流动有一定的指导意义。     

Estimating the size of the shadow economy in Spain: a structural model with latent variables

There has recently been a revival of international interest in measuring the size of the shadow economy. The current study adopts an approach to the Spanish case that is based on the theory of unobservable variables. This methodology involves the estimation of structural models (MIMIC) which analyses a set of causes of the shadow economy while simultaneously taking into account its influence upon a series of indicators. The proposed model permits the determination of a relative evolution over time of the size of the shadow economy, which requires the calibration of the model with an exogenous estimation in order to obtain real values. The exogenous estimation employed is that obtained by a monetary method based on a money demand function. The results show a considerable shadow economy, measuring between 8 and 18.8% of GDP in the period 1976–2002, and demonstrate that the shadow economy is significantly influenced by the tax burden, the degree of regulation and unit labour costs. A positive correlation is obtained between GDP, money demand and the level of the shadow economy.     

Country characteristics and the incidence of capital income taxation on wages: An empirical assessment

This paper examines the incidence of corporate income taxes on wages using data from the US Bureau of Labor Statistics for 13 OECD countries. Within a wage‐bargaining framework, our econometric analysis shows that a substantial share of the corporate tax burden is shifted from capital to labour. However, the magnitude of this shift is influenced importantly by country characteristics affecting the process of wage determination, such as the degree of capital mobility, a country's relative influence over the world price of output and trade unions’ strength.     

An empirical investigation of long-run growth in the UK

In this paper the long-run growth of the UK economy is analysed over the period 1855–1997, using a Markov-switching cointegration approach. We find that long-run economic growth can be explained by two permanent shocks, namely a technological shock and a labour supply shock. While technological progress seems to have a positive impact on the wage share and on income equality, the labour supply shock has the opposite effect, contributing to income inequality. Both shocks have a positive impact on aggregate output, but the bulk of long-run output growth variability is explained by the labour supply shock, suggesting that inequality is not harmful to growth.     

Capital account openness and the labour share of income

This paper investigates the relationship between capital accountopenness and the share of labour in national income. Employinga new index of financial openness and a cross-country panelof labour shares available from the United Nations System ofNational Accounts, the author shows a robust negative correlationbetween the degree of openness and the labour share. Althoughthis effect is not present for low income countries, the directnegative relationship holds for all other subsamples and inthe presence of a variety of controls. A plausible explanationis that openness alters the conditions of bargaining betweenlabour and capital. By increasing the bargaining strength ofcapital vis-a-vis labour, increased capital mobility raisesrents accruing to capital. Thus, capital account openness mayreduce labour's share of income in the firm, and thereby, atan economy-wide level, its share of national output.     

The labour income share and the relative price of investment in the US: an empirical investigation

Several studies argue that the recent decline in the secular trend of the labour income share is mostly driven by capital-embodied technological progress which is typically identified with trend reductions in the relative price of investment. In this paper, I use data from the United States to assess the nature of the relationship between trends in the labour share and the relative price of investment. Results from co-integration tests reveal that the share and the relative price of investment are most likely not co-integrated. However, co-variation tests indicate that both time series share a common stochastic component, and additional tests of structural breaks point at the presence of a common change in the mean or trend of both series. These results suggest that capital-embodied or investment-specific technological progress may have played an important role in the decline of the secular trend of the labour share.     

THE DRIVING FORCES BEHIND THE FALLING LABOUR SHARE AND PERSISTENT UNEMPLOYMENT IN JAPAN

Like in most advanced countries, the labour income share in Japan has been falling since the mid‐1970s. However, in contrast to other advanced economies, Japan experienced an exceptional recessive period in the 1990s and 2000s, with the rate of unemployment rising to a historical maximum of 5.5% in 2002, to persist above 4% in subsequent years. In the present paper, we examine the main causes behind the paths followed by the labour income share and the unemployment rate during the post‐1997 crisis period (1997–2002) and the transition years that followed (2002–2009). We do so by estimating a multi‐equation macro model that allows us to look separately at the various components of this particular labour market: wages, output, and employment. Our main finding is that the fall in the labour share can be attributed to the changes that took place within the labour relations system (the weakening of unions mainly) and that the surge in unemployment can be altogether ascribed to the distorting effects of the sizeable and increasing public debt.     

PRIVATE INTERGENERATIONAL TRANSFERS AND THEIR ABILITY TO OFFSET THE FISCAL BURDEN OF AGEING

The ratio of retirees to workers in developed countries is expected to increase sharply in the next few decades. In the presence of unfunded income support policies, this increase in old age dependency is expected to increase the future fiscal burden of ageing, which is seen as a threat to living standards. Private intergenerational transfers in the form of bequests are also expected to increase in ageing societies, which may offset the adverse effects of the fiscal burden of population ageing on future living standards. This paper quantifies the ability of these private intergenerational transfers to offset the future fiscal burden of ageing in Australia. This is done through developing a dynamic overlapping generations simulation model with realistic demographics. Calculations based on steady-state simulations (with a pay-as-you-go tax rate equal to 3.3% of GDP) suggest that a bequest to GDP ratio of 1% offsets approximately one-third of the fiscal burden over the lifecycle when measured as a proportion of simple labour income and one-eleventh of the fiscal burden when measured as a proportion of full income (labour income plus leisure). The model is calibrated for Australia under a small open economy assumption such that the optimal solution mimics important cross-sectional and time-series fundamentals of the Australian economy. For the non-steady-state, intergenerational accounting suggests that the empirically plausible intergenerational transfers are strong enough to offset most of the tax burden (80–90%) when measured as a percentage of simple labour income and up to one-quarter of the burden when fiscal burden is measured as a percentage of full income.     

Optimal Taxation with a Trade-off Between Income and Children

This paper explores the implications of endogenous fertility for optimal redistributive taxation in the presence of a trade-off between labour income and children. The labour supply is a decreasing function of the desired quantity and quality of children. Since children enter into the parent's budget constraint in a nonlinear form, their shadow prices are directly distorted by the income tax rate. It is shown that the substitution effects of the income tax rate on the quantity and quality of children cannot be signed uniquely although the effect on labour supply is negative. The aggregate substitution effect of the income tax rate on the quantity of children plays an important role in the determination of the signs of the income tax and child subsidy rates at a Rawlsian or Benthamite social welfare optimum.
JEL Classification Numbers: H21, J13, J22     

The not so dark side of trust: Does trust increase the size of the shadow economy?

This paper reports a negative relationship between the size of the shadow economy and generalized trust, in a sample of countries, both developed and developing. That relationship is robust to controlling for a large set of economic, policy, and institutional variables, to changing the estimate of the shadow economy and the estimation period, and to controlling for endogeneity. It is independent from trust in institutions and from income inequality, and is mainly present in the sample of developing countries. Those findings suggest that the tax compliance effect of trust dominates its role as a substitute for the formal legal system.     

The growth effects of tax rates in the OECD

This paper explores the merits of macro‐ and micro‐based tax rate measures within an open economy “fiscal policy and growth” model. Using annual data for 15 OECD countries we find statistically small, non‐robust long‐run growth effects of macro‐based average tax rates on capital income and consumption, but some evidence for average labour income tax effects. Changes in “micro” marginal income tax rates at both the personal and corporate levels yield statistically robust GDP responses of modest size. Both domestic and foreign corporate taxes appear relevant. In general, tax effects on GDP operate largely via factor productivity rather than factor accumulation.     

Ageing, productivity and wages in Austria: sector level evidence

In this paper we analyse the link between the age structure of the labour force and average labour productivity as well as average wage across industrial sectors. While this intermediate economic level has been under-explored up to now, we will argue that it provides valuable insights in several respects. Our analysis is based on a panel data set ranging over 6 years (2002–2007). It covers the sectors of mining, manufacturing and market oriented services in the Austrian economy. Our results exhibit a positive correlation of the share of older employees and productivity, whereas we cannot find any evidence for a significant relationship of the share of younger employees and productivity. Moreover, the estimated age-wage pattern does not hint at an over-payment of older employees.     

Price and nominal wage Phillips curves and the dynamics of distribution in Japan†

This study estimates two types of Phillips curves – the price Phillips curve and nominal wage Phillips curve – for the Japanese economy and analyses the institutional structure of the dynamics of effective demand and income distribution in each period from 1977 to 2007. The estimated results allow us to make the following three findings. First, the Japanese economy was a profit-led regime and a counter-cyclical wage share regime. The combination of regimes can make the dynamics of effective demand and income distribution unstable. Second, the dynamics of price and nominal wage do not reflect each other in Japan by labour–management cooperation. Finally, after 1997, the distributive regime in Japan switched from a counter-cyclical wage share to a pro-cyclical wage share regime because Japanese firms quickened their speeds of employment adjustment. As a result, the dynamics of effective demand and income distribution were stabilised.     

The Shadow Economy in German Regions: An Empirical Assessment

Despite the increasing number of contributions to the literature, regional variations of the shadow economy have been hardly studied. This article analyses the determinants and derives the size of the shadow economy on the district level in Germany. I find that an inferior local labour market and the burden of taxation significantly contribute to the existence of the shadow economy, while a better enforcement of tax rules and regulations has the potential to deter such activities. Districts in the affluent south of Germany experience on average smaller shadow economies.     

How does anti-corruption campaign affect the labour income share in China?

Based on the difference-in-difference (DID) methodology, this paper empirically investigates the impact of the current anti-corruption campaign on the share of labour income in China. Using a firm-level data on Chinese corporations listed on Shanghai and Shenzhen Stock Exchanges from 2009 to 2015, we find that the campaign contributes to the rise in the labour income share, while there is considerable heterogeneity. The magnitude of the effect depends on firm’s ownership and market power. This paper advances the existing studies examining the nexus between corruption and income distribution from a novel perspective.     

Exploring the dynamics of the shadow economy across US states

This article examines the dynamics of the shadow economy using data for 50 US states over the period 1998–2008. Using a panel VAR model, we analyse the impulse response of the shadow economy to an orthogonal shock in capital tax rates, educational attainment, union participation and gross state product. We find evidence of significant dynamics underlying the relationship between the shadow economy and its determinants. The results remain robust to alternate measures of the determinants of the shadow economy, alternate causal ordering of the variables in the system and conditioning on the level of income in each state.     

THE SHADOW‐PRICE OF LABOUR AND EMPLOYMENT BENEFITS IN A DEVELOPING ECONOMY

The paper describes and analyses data obtained from a survey of the labour force of a tuna cannery in Papua New Guinea. Estimates of the value of employees’ work and travel time are obtained and used to calculate the shadow‐price of labour under alternative assumptions about the labour market and the economy. The shadow‐prices are used to calculate annual employment benefits to the indigenous labour force and to the economy as a whole. These benefits can amount to approximately half of the gross wage bill. Benefits by sex and skill category of worker are also reported. The results of the paper can be used to calculate employment benefits in other similar circumstances in other industries and countries.