A MICRO-ECONOMETRIC APPROACH FOR ASSESSING THE DETERMINANTS OF THE INFORMAL ECONOMY IN ROMANIA*

The paper investigates the taxonomy of the households participating in informal activities in Romania using econometric and clusters analysis. The models employed consider that the economy consists of three sectors: formal, informal and public. Only economic agents and workers in the formal sector pay taxes. By investigating the relationship between poverty levels and the tax burden and the propensity of the households to engage in informal activities, the work finds that increases in income taxes lead to increases in the number of persons engaged in informal activities; the increase is much more significant in urban than in rural areas. At the same time, the higher the number of persons working in the informal economy, the lower the impact of a tax rise. The paper reveals that in the rural areas around 87% of the households that pay taxes and have expenditures exceeding the average per sample participating in informal activities are young or very young. They have a medium level of education, have children in school, their household expenditures exceed the declared money incomes and their earnings are around 4.8 times lower than a "decent" income. Further, in the urban areas around 72.5% of the households that pay taxes and incur expenditures exceeding the average per sample and engage in informal activities are young or very young. They have a primary level of education and an income around 3.5 times lower than a "decent" income. * (The authors are grateful for the support received from the ACE PHARE program for undertaking this research. A draft of this paper was presented to the participants in the workshop organised in Bucharest at the beginning of April 2002, from whom we have received extensive comments and suggestions. We are extremely grateful to B.Y. Kim, E. Dobrescu, L.L. Albu, G. Duchenne, A. Kolev, M. Kotzeva, and A. McAuley for their pertinent observations).