Estimation Methods of Shadow Economy in Economics
A Blog Post by Pablo Markin.
In their article, Friedrich Schneider and Andreas Buehn have evaluated “various methods used for estimating the size of the shadow economy”, in order “to demonstrate that there is no single infallible method for estimating the size and development of the shadow economy” (1). The authors have defined the term of “shadow economy” as an “all market-based legal production of goods and services that are deliberately concealed from public authorities” (2).
Based on their research, Schneider and Buehn argue that “[s]urvey methods are likely to underestimate the shadow economy because people are likely to under-declare in surveys what they are trying to hide from authorities” (266). To estimate the size of the shadow economy, the authors have applied a “latent estimator approach using the MIMIC (i.e. multiple indicators, multiple causes estimation) procedure” (12). According to these authors, the MIMIC method for evaluating the extent of the shadow economy uses relative coefficients and is “highly sensitive with respect to changes in data and specifications” (23).
For these reasons, based on their longitudinal analyses, Schneider and Buehn suggest that “[t]here is no ideal or leading method to estimate the size and development of the shadow economy” (23). As this study indicates, in the scholarly literature “[a] common and internationally accepted definition of the shadow economy is still missing” (23).
By Pablo Markin
Featured Image Credits: Town come to country…, October 4, 2008 | © Courtesy of Adventures of KM&G-Morris/Flickr.