The Minimum Wage Fuels Romania’s Shadow Economy?

Abstract

The recent increases in the minimum wage in Romania represent a popular topic at the national level, which indicated that aggressive increases in the minimum wage could create a competitiveness problem in the context of a relatively high level of informal economic activities. The main objective of this chapter is to measure the effects of the minimum wage on Romanian informal activities based on the sharp increases in the minimum wage observed in the recent periods and the new increase planned by the government in the future using quarterly data for the period 2000–2015. The size of the SE was estimated using the MIMIC model, and the empirical results reveal that unemployment, self-employment, indirect taxation and lack of trust in government can be considered causes of Romanian informality. The empirical results indicate that an increase in the minimum wage can be considered a longterm supporting factor for the shadow economy because it increases informal economic activities, as firms will seek alternative methods of circumventing authorities.