Structural and Cyclical Patterns of Underground Labour Input in Italy from 1980 to 2004

In this paper we investigated empirically the nature of underground employment in Italy, considering its longrun trend and short-run fluctuations. The examined time series of underground employment is provided by the Italian National Institute of Statistics (ISTAT), though for the business cycle analysis we also employ a time series of evaded tax base provided by the Ministry of Finance. The analysis focuses on the period 1980-2003, a time span during which major labour market reforms occurred in Italy, with an evident impact on underground employment. Our investigation pointed out several interesting regularities. Cyclical behaviour of the regular labour input is deeply affected by the aggregate measure of economic activity used as reference variables, i.e. total or market GDP. Second, the cyclical regularities indicate that the resources allocated to the underground economy are mostly motivated by flexibility requirements. Third, the dynamic adjustments of employment between the regular and underground market, are inextricably tied to one another over the cycle. Surprisingly, the relationship between the labour inputs changes with the GDP measure adopted. It may highlight a reallocation mechanism among labour inputs or a labour drag effect.