Fazley K. Siddiq, Ph.D., School of Public Administration, Dalhousie University, 6100 University Avenue, Halifax, NS B3H3J5, Canada
Measuring the Size of the Underground Economy:
Cross Jurisdictional Comparisons
ABSTRACT
The complexity of defining and conceptualizing the underground economy makes it difficult to develop a uniform methodology to measure it. While some of the essential characteristics of the underground economy are the same in every country, such as certain types of market based goods and services escaping detection by the tax authorities, there are differences in the manner in which other types of production, especially non-market goods and services, are treated. There is therefore not one uniformly agreed upon definition of the concept across jurisdictions.
Using the definition of the underground economy provided by Statistics Canada as a baseline, this study presents a cross-jurisdictional analysis of the way in which jurisdictions define, and subsequently measure, the underground economy. Statistics Canada defines the underground economy as “the portion of the total economy that is unobserved due to the efforts of some businesses and households to keep their activities undetected.”[1] It presents four other possible definitions of the underground economy based on whether activities are legal or illegal, whether activities “escape detection” from inclusion in official estimates of Canada’s GDP or from tax authorities, and whether the activities are market-based or not. Statistics Canada only includes activities that are market-based in its definition of the underground economy. The definition offered by Statistics Canada is compared against those provided by the tax authorities in the province of Quebec, the United States, the state of California, the United Kingdom, Sweden, France, New Zealand, and Australia. Government documents published by each jurisdiction are analyzed to determine how each jurisdiction approaches the defining and measuring of the underground economy. Measurement obstacles faced by each jurisdiction are also highlighted.
Preliminary results suggest that the potential size of the underground economy as reported by each jurisdiction is largely influenced by the manner in which it is defined, which, in turn, dictates measurement.
Key Words: underground economy, tax compliance
[1] Philip Smith. “Assessing the Size of the Underground Economy: the Statistics
Canada Perspective”,
Statistics Canada Research Paper 1994. Catalogue no. 13-604-MIB – No. 28, p. 6.