Moderatİng effect of economic freedom on the relationship between human capital and shadow economy

Abstract

The empirical analysis of the relationship between human capital and shadow economy in the presence of economic freedom is conducted in this paper. Annual panel data are collected in the period 1999-2013 for the sample of 34 countries. The results of linear static and dynamic panel data estimators suggest an impact of economic freedom that is not significant. ARDL framework suggests a significant negative impact of human capital on shadow economy only in the long-run indicating that more educated workforce tends to avoid informal economic activities. Short-run impact is not found to be significant. This result is expected since human capital is considered to be a classic time-variant covariate, i.e. any change requires longer time period. The extended model suggests a significant negative impact of human capital only in the long-run. Economic freedom is not found to be significant in both, short- and the long-run. However, it is important to emphasize that the coefficient with moderator is significant and positive in the short-run indicating that economic freedom supports more educated workforce in their intention to decrease informal economic activity. Hence, as a policy implication there is a necessity to contribute to economic freedom in order to increase the human capital of workforce who will tend to decrease shadow economy.