Informal Sector and Real GDP Per-Capita

Abstract

Informal sector, also called the underground economy, is part of a country’s economy that is not recognised as normal income sources, including but not limited to sweatshop labouring, tax avoidance, or any illegal and unregulated sources. These factors have significant impacts on the economy. In this paper I investigate the empirical relationship between informal sector size and several variables, particularly GDP per capita and some proxies of institutional quality. To this end, I gather data from a large number of countries and then run a correlation analysis. I also supplement my empirical study with additional regression analysis. My findings indicate that higher-quality institutions are associated with a smaller informal sector size. On the other hand, there is no significant correlation between informal sector and GDP per capita.