Relationship between tax wedge and informal economy in OECD countries: Panel data analysis

Although the informal economy differs according to the level of development of the countries, it is the problem of every country. The problem of the informal economy causes problems in macro dimensions. In order to cope with these emerging problems, the reasons for the informal economy should be revealed first. The causes of the informal economy have been investigated in various studies. Causes of the informal economy; social, cultural, psychological, economic, institutional etc. They can be considered as factors. In this study, the relationship between the tax wedge, which is shown as one of the causes of the informal economy, has been revealed with empirical results. Covering the years 2000-2017, the study was carried out by considering the 15 OECD countries with the highest tax wedge rates. In the study, it was found that there was a problem of cross-section dependence. For this reason, the study was carried out with the second generation panel data analysis tests. The stationarity of the series was tested with the Pesaran CIPS unit root test. With the Westerlund and Edgerton cointegration test, the long-term relationship between the informal economy and the variables was examined, and the significance of the AMG estimators and coefficients was tested. Finally, the Emirmahmutoğlu-köse causality test and the direction of the relationship between them were examined. As a result of the study, a cointegration relationship was found, but the AMG coefficient estimators were not significant except for certain countries. There are also results with negative correlations between significant countries. In addition, as a result of the causality test, bidirectional causality was found between the informal economy and the tax wedge. Although studies in the literature say that social security burdens increase the informal economy, no long-term relationship has been found between them. This can be explained by the perception effect. People have established a positive relationship between the premiums they pay and the benefits they receive, and therefore they do not affect the informal economy in the long run.