‘Black economy’ activities by self-employed people in the UK amount to
10.6% of GDP, according to new research by Panayiota Lyssiotou, Panos
Pashardes and Thanasis Stengos, published in the July 2004 Economic
Journal.
Their analysis of under-reporting of income by the self-employed suggests
that:
· Households whose heads are in blue-collar occupations on average
report only 46% of their income.
· Households whose heads are in white-collar occupations on average
report only 61% of their income.
Estimating the size of the black economy is important for assessing the
seriousness of the problem and for the correct measurement of GDP and
employment. In general, empirical approaches to estimating the size of black
economy activities rely on economic relationships thought to contain
information about such activities.
This study uses the relationship between demand for goods and the level of
household income estimated from data drawn from the Family Expenditure
Survey (FES). To the extent that certain household groups – such as the selfemployed
– under-report their income, their expenditure pattern would
resemble the expenditure pattern of better off households known to report
their income correctly – such as civil servants.
The method this study uses to estimate the size of the black economy
improves on previously used methods mainly because it safeguards against
wrongly attributing to under-reporting of income the observed differences in
spending behaviour that are caused by differences in household preferences.
The researchers show that failing to account for this can understate the size
of the black economy.
The results indicate that self-employment income reported by blue collar
households needs to be scaled up by a factor of 2.18 to correct for underreporting;
whereas the corresponding figure for self-employment income
reported by white collar households is 1.64.
Considering that reported self-employment income is around 12% of GDP and
that blue collar households account for nearly 46% of reported selfemployment
income and white collar households for over 54%, the estimates
suggest that self-employment related black economy activities in the UK
amount to 10.6% of GDP.
The researchers note that the black economy, broadly defined as the
economic activities that are hidden from public authorities to avoid taxation,
undermines the financing of public goods and social protection.
At the same time, a country trying to curtail the loss of tax revenue by raising
tax rates can create a vicious cycle, as this reinforces the incentive not to
declare economic activities to the public authorities.
There can also be distorting effects due to unequal opportunities and
willingness to evade in different sectors of the economy and because
individuals working in the black economy may be unwilling to move from one
job to another.
ENDS
Note for Editors: ‘Estimates of the Black Economy Based on Consumer
Demand Approaches’ by Panayiota Lyssiotou, Panos Pashardes and
Thanasis Stengos is published in the July 2004 issue of the Economic
Journal.
Lyssiotou and Pashardes are at the University of Cyprus, PO Box 20537,
Nicosia 1678, Cyprus; Stengos is at the University of Guelph, Guelph,
Ontario, Canada N1G 2W1.
For Further Information: contact Panayiota Lyssiotou on +357-2-892435
(email: p.lyssiotou@ucy.ac.cy); or RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).