Estimating the size of underground economy in Romania

After 1989, the size of the underground economy has become an important issue of concern to policy-makers in Romania. The problem seems even more serious in relation to Romania's preparation for accession into the EU.

The main goal of the study presented in the paper is to overcome the deficiencies of the econometric approach for estimating the size of the underground economy by deeper investigation of the behavioral aspects of participation of the different groups of population in the informal sector. The original methodology used tries to capture and describe the realistic picture of people’s participation in underground activities in response to changes in their official income.

Based on two Romanian household surveys, the paper presents the structure of households’ income by sources: main job, secondary job, and hidden activities. It estimates the size of the informal economy, analyses the relationship between different types of income, and explores the dynamics of the informal economy.

The findings indicate that:

• both in September 1996 and in July 2003 the informal income in Romania amounted to about 1/4 of total household income
• the informal economy has increased, on average, by about 2-2.5% over the period 1995-2002
• people perceive taxation as the main cause behind the prevalence of the underground economy
• both the poor (having probably a low educational level) and the rich are involved in the informal economy
• households' behavior related to participation in the informal economy is sometimes fundamentally different between the two extreme groups of population
• the poor people are the main participants in the informal economy: the survival motive is dominant in the Romanian informal economy.

The general corollary of the research is that despite the econometric evidence for non-dependence between the levels of formal and informal income, they both are very strongly interrelated. So, the size of the underground economy in Romania could be considered as a function of the level of its citizens’ official earnings.