Illicit work and the shadow economy labour force

After an extensive examination of the size and rise of the shadow economy in terms of added value, this section analyses the black labour market. In the official labour market, there is a particularly tight relationship and ‘social network’ between people who are active in the shadow economy. Moreover, by definition, every activity in the shadow economy involves illicit work to some extent. Hence, this market includes all cases where the employees, the employers, or both, occupy a ‘shadow economy position’. Why do people work in the shadow economy? In the official labour market, the costs firms (and individuals) have to pay when ‘officially’ hiring someone are increased tremendously by the tax burden and social contributions on wages, as well as by the legal administrative regulations that control economic activity. In various OECD countries, in effect, these costs are greater than the wage earned by the worker – providing a strong incentive to work in the shadow economy. Lemieux, Fortin, and Fréchette (1994) analyse the labour supply decision in the underground economy by using micro data from a survey conducted in Quebec City (Canada). In particular, their study provides some economic insight regarding the distortion caused by income taxation and the welfare system. The authors conclude that hours worked in the shadow economy are quite responsive to changes in the net wage in the regular (official) sector.