Underemployment and Shadow Economy; Is There a Structural Relationship? A Lab-Experimental Test

This study examined the potential link between the shadow economy and underemployment through a controlled laboratory experiment. The study involved 240 undergraduate participants from the University of Peradeniya in Sri Lanka. It consisted of eight meticulously managed sessions, with 30 individuals in each, conducted in a computer laboratory. The results indicated that lower intensity in the assigned status of income and occupation reduced the participants' satisfaction with their occupational experience and motivated them to enroll in the shadow economy. Notably, awareness of the shadow economy did not significantly influence the participants' willingness to engage in similar activities, as the majority were primarily motivated by private rather than societal gains. Even those who expressed a preference for participating in the shadow economy were less ambitious and favored transactions outside official tax schemes. Additionally, income-driven underemployment was found to prompt participants to increase their involvement in the shadow economy. Therefore, addressing income-driven underemployment concerns could mitigate individuals' propensity to participate in the shadow economy.