Anatomy of the shadow economy: Structure, dynamics and impact on macroeconomic stability in times of crises

Abstract

Aim. To test hypotheses about the counter-cyclical nature of the shadow economy and its role as a “shock absorber of social costs”.Objectives. To study the dynamics and structure of the shadow economy and employment during the crises of 2008–2009, 2014–2016 and 2020–2022; to analyze the ability of the shadow economy to absorb unemployment and smooth the fall of the economy; to identify the components of the dynamics of the shadow economy during the crises.Methods. The article is based on the analysis of unobserved economy estimates, microdata of labor force surveys of Rosstat and the Russian Monitoring of Economic Situation and Health of the National Research University Higher School of Economics. The dynamics of shadow gross domestic product (GDP), employment without registration, tax evasion, and unregistered entrepreneurial activity is analyzed. Balance models of workers’ transitions between formal and shadow employment were developed.Results. The data showed that the shadow economy is highly flexible and can temporarily absorb part of the unemployed and gross output in crises. However, its impact on macroeconomic stability is limited. Shadow employment serves as a factor of instability for shadow workers. Three groups of actors that determine the dynamics of the shadow economy are identified: entrenched, outsiders and reactive. The bulk of the shadow economy is concentrated in small and medium-sized businesses.Conclusions. The shadow economy can both contribute to the maintenance of economic activity, employment, and act as a driver of crises. In the author’s opinion, it is necessary to improve state regulation to facilitate legalization of business and employment of the “rooted” segment of the shadow economy.