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The Politics of the Black Economy

On the basis of indirect estimates of the size of the black economy, it has been argued that failure to measure black economic activity in official government statistics has produced a misleading picture of the state of the economy, overestimating both the rate of inflation and the level of unemployment and underestimating the effects of tax rates on the level of tax evasion. These arguments, which suggest that large numbers of those recorded as being wholly unemployed are actually working in the black economy, have strong political implications for tax cuts and attitudes towards welfare and poverty. This paper provides a critique of the indirect measures of the size of the black economy and argues that none of them can be relied upon to produce accurate estimates. An examination of some of the microeconomic evidence collected by economists, sociologists and anthropologists suggests (i) that the more dramatic numbers produced by indirect measures may represent considerable overestimates of the actual size of the black economy in the United Kingdom and (ii) that there may be good reasons why it is easier for moonlighters rather than the unemployed to work in the black economy. If this is so, the policy arguments based on these indirect measures of the black economy do not rest on firm foundations and should therefore be regarded as political special pleading.