Corporate labour share of income and the shadow economy: a cross-country analysis

ABSTRACT

This article addresses a link between the size of the shadow economy and the corporate labour share of income in the European Union. Fixed individual and time effects models suggest that there is a negative link between these two indicators. The coefficients are statistically significant if we control for other variables related to labour markets, such as unemployment rates or strictness of employment protection (regular contracts). Depending on the exact model specification, our estimates suggest that an increase in the shadow economy by 1% of GDP results in a 0.5–1% decline in the labour share of income in the corporate sector.

KEYWORDS:

• Shadow economy
• labour share of income
• cross-country analysis
• tax evasion

JEL CLASSIFICATION:

• E25
• E26
• J46
• O17

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ The corresponding p-values are in the range 3.07 × 10¹⁴–4.67 × 10⁷.

² This is a common feature of plm package in R, which was used in our work. In comparison, a few other packages consider variation explained by fixed effects as ‘explained variation’, resulting in very high coefficients of determination.