Measuring the Global Shadow Economy

Measuring the Global Shadow Economy

The Prevalence of Informal Work and Labour

Colin C. Williams and Friedrich Schneider

This book brings together two leading researchers in the field to provide a comprehensive overview of the shadow economy from a global perspective. Reviewing the advantages and disadvantages of different ways of measuring the informal sector, the authors evaluate its size and key determinants across the world. Williams and Schneider clearly establish the persistence and prevalence of the shadow economy, analysing the narrowness of existing policy approaches and explaining how these fail to address the key factors for its existence and may even exacerbate the problem.

Chapter 9: A way forward

Colin C. Williams and Friedrich Schneider

Subjects: economics and finance, labour economics, public finance, social policy and sociology, labour policy


The problem with solely using a ‘hard’ compliance approach, which seeks to alter the cost/benefit ratio confronting those thinking about or actually participating in the shadow economy, is, on the one hand, that it assumes participants are purely rational economic actors and, on the other hand, that it is expensive and also often ineffective. Rather than ‘bribe’ somebody to be compliant, for example, a more effective and possibly cost-efficient approach at least in the first instance, is to encourage self-regulation by engendering a willing or voluntary commitment to compliant behavior (Alm, 2011; Kirchler, 2007; Torgler, 2007, 2011). To understand this soft commitment approach, it is necessary to appreciate its theoretical underpinnings, which result in a view of participants as social actors rather than purely rational economic actors. This approach can be seen to be grounded in an institutional theoretical approach that argues that activities, including the shadow economy and shadow labour, have to be understood within their institutional context (Baumol, 1990; Baumol and Blinder, 2008; Helmke and Levitsky, 2004; North, 1990). Institutions provide ‘the rules of the game’ and norms that govern human behaviour (Baumol and Blinder, 2008; Denzau and North 1994; North, 1990).

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