We use cookies to provide you with the best possible website experience. This includes cookies that are necessary for the operation of the site, as well as cookies used for anonymous statistics, comfort settings, or displaying personalized content. You can decide which categories you want to allow. Please note that depending on your settings, some features of the website may not be available.

Cookie settings

These necessary cookies are required to enable the core functionality of the website. Opting out of these cookies is not possible.

cb-enable
This cookie stores the user's cookie consent status for the current domain. Expiry: 1 year.
laravel_session
Stores the session ID to recognize the user when the page reloads and to restore their login session. Expiry: 2 hours.
XSRF-TOKEN
Provides CSRF protection for forms. Expiry: 2 hours.
IZA Discussion Paper No. 11247
December 2017
Nature of the Relationship between Minimum Wage and the Shadow Economy Size: An Empirical Analysis for the Case of Romania
Adriana Anamaria Davidescu, Friedrich Schneider

The recent increase in the minimum wage in Romania in early May 2016 represented a popular topic at the national level, which indicated that aggressive increases in the minimum wage could create a competitiveness problem in the context of a relatively high level of informal economic activities. The objective of this paper is to analyse the nature of the relationship between the minimum wage and the size of the Romanian shadow economy using quarterly data for the period 2000-2015. The MIMIC model has been used to estimate the dimension of the shadow economy, and the empirical results revealed that unemployment, self-employment, indirect taxation and a lack of trust in the government are considered the main causes of Romanian informality. The results also indicated that the Romanian shadow economy decreased until 2008 to a value of approximately 27.8% of the official GDP. During the economic crisis, a slow increase in the shadow economy occurred, whereas in recent quarters, a slow decrease was observed. The potential effect of an increase in the minimum wage on the size of the shadow economy has been analysed using the Granger causality approach with vector error correction models. The empirical results indicated that an increase in the minimum wage can be considered a long-term supporting factor for the shadow economy because it increases informal economic activities, as firms will seek alternative methods of circumventing authorities. However, the empirical results do not support any effects of an increase in the minimum wage in the short run.

Communications
Mark Fallak
mark.fallak@liser.lu
+352 585-855-526
World of Labour
Olga Nottmeyer
olga.nottmeyer@liser.lu
+352 585-855-501
Network Coordination
Christina Gathmann
christina.gathmann@liser.lu

The IZA@LISER Network is a global community of scholars dedicated to excellence in labor economics and related fields, now coordinated at the Luxembourg Institute of Socio-Economic Research (LISER) following its transition from Bonn.

About IZA@LISER Network
Contact
IZA Network (Current Site Operator):

Luxembourg Institute of Socio-Economic Research (LISER)
11, Porte des Sciences
Maison des Sciences Humaines
L-4366 Esch-sur-Alzette / Belval, Luxembourg

IZA Institute (In Liquidation):

Forschungsinstitut zur Zukunft der Arbeit GmbH i. L.
Schaumburg-Lippe-Str. 5-9, 53113 Bonn. Germany
Phone: +49 228 3894-0 | Fax: +49 228 3894-510
E-Mail: info@iza.org | Web: www.iza.org
Represented by: Martin T. Clemens (Liquidator)