Abstract
Over the past several decades, the growth of the shadow economy has drawn increasing attention from both academia and the public spheres. As the concept of the shadow economy has gained popularity, some of the fundamental issues, such as what shadow economy exactly entails and how to measure its size, remain inconsistent. Colin C Williams and Friedrich Schneider’s new book, Measuring the Global Shadow Economy: The Prevalence of Informal Work and Labor, provides a comprehensive overview on different ways to measure the shadow economy. However, readers should not consider the book a mere collection of methods, because the book includes a substantive discussion of the theoretical and political underpinnings of the topic.
The book’s introduction underscores the multifaceted nature of the shadow economy as well as its research significance. Williams and Schneider point out that although the shadow economy is generally defined as ‘what is absent, insufficient or missing from the formal economy’ (p. 2), different stakeholders may adopt different definitions. It is the inconsistencies and complexities involved in the definition of the shadow economy that make an in-depth discussion on how to measure this economy and its labor force necessary.
The rest of the book is divided into four sections, each comprising of several chapters. The first section catalogs an array of direct and/or indirect measurement methods. The direct methods refer to ways to collect information on the shadow economy and its labor force via large-scale surveys at the micro level. Indirect methods refer to modeling the size of the shadow economy by utilizing social, economic, and political indices at the macro level. By carefully investigating the advantages and disadvantages of each method, Williams and Schneider convincingly demonstrate that rather than relying on a single method to quantify the size of the shadow economy, researchers should triangulate the results using different methods. A rule of thumb is that direct survey methods usually provide the lower bound of the estimate, whereas indirect methods usually provide the upper bound. It is also noticeable that among the direct and indirect methods introduced, Williams and Schneider engage in a detailed depiction of the multiple causes and multiple measurements (MIMIC) method – one of the most commonly used indirect methods for estimating the size of the shadow economy. Readers may find the MIMIC method innovative and intriguing because it utilizes the concept of ‘latent variable’ in statistical theory to assess the size of the shadow economy, which is essentially a process of linking an underserved concept (i.e., shadow economy) to measurable constructs while taking the underlying structures of the relationships into consideration.
To further shed light on the complexities of the issue, parts II and III provide practical examples for estimating the size of the shadow economy and shadow labor force. Part II illustrates the size of the shadow economy across different nations using the MIMIC method. Although the results reveal great geographic variations in the size of the shadow economy, its mere size equates to 17.1% of GDP at the average national level, suggesting the economy’s prevalence and persistence (p. 71). Part III complements Part II by exploring the degrees of informality of the labor force across different countries. In this part, Williams and Schneider reveal that there are more people employed in the shadow labor force than in the formal labor force at the global level – another important yet often ignored fact about the current global economic system. Williams and Schneider then proceed to discuss three competing theoretical perspectives, namely those of modernization, neoliberalism, and political economy. Each perspective offers insights on the determinants on the variations of the shadow labor force. In particular, the modernization perspective hypothesizes a negative association between a nation’s economic development and the size of the shadow economy. The neoliberal perspective suggests that state governance plays an important role. High taxes, corruption, and overregulation would make jobs in the informal economy more appealing than in the formal economy. The political economy perspective highlights the role that the informal sector plays in alleviating poverty.
Having reviewed the measurement methods and empirically evaluated the size of the shadow economy and labor force from a cross-national perspective, the final part of the book sets forth ways of tackling the shadow economy and its labor force. Williams and Schneider argue that most governments adopt the ‘hard’ compliance approach – that is, detecting and punishing noncompliance. The goal of the hardline compliance approach is to trigger behavioral changes on the part of participants of the shadow economy in order to move it into the formal economy; in other words, suppress the shadow economy and its labor force. However, as Williams and Schneider correctly point out later, participants in the shadow economy should not be considered pure rational economic actors whose behaviors are only guided by cost–benefit analyses. Policy makers and practitioners need to take full consideration on the institutional asymmetry between the formal and shadow economies, and adopt ‘soft’ approaches instead of hard ones, including ways to reform both formal and informal institutions.
Overall, the book weaves empirical evidence with theoretical underpinnings, and provides thoughtful political discussions on ways to appropriately address the shadow economy. It synthesizes the most up-to-date research advancements on the shadow economy from multiple disciplines, including economics, sociology, public policy, human resource management, and organizational behavior. Throughout the book, Williams and Schneider dispel several myths about formal and shadow economies, and this is vividly demonstrated in Figures 6.1 and 7.1, where the economies and employment relationships are rated on a 0 to 10 scale, ranging from ‘wholly formal’ to ‘wholly shadow.’ It is these subtle and detailed descriptions found throughout the book that constantly remind readers about the complexities of the issue. Students, scholars, policy makers, and practitioners who are interested in the shadow economy will find the book insightful as it provides a comprehensive overview of existing theories, methods, and policies and the shadow economy and its labor force from a cross-national perspective. Because the book adopts a cross-national perspective, by default it leaves many national or regional-specific issues untouched. Therefore, readers in particular nations or regions, especially in the non-European context, may find it necessary to search for additional readings after finishing Williams and Schneider’s book.