Income inequality and the informal economy in transition economies

For transition economies, income inequality is positively correlated with t he share of output produced in the informal economy. Increases in income in equality also tend to be correlated with increases in the share of output p roduced in the unofficial economy. These hypotheses are supported significa ntly by empirical data for 16 transition economies between 1987 to 1989 and 1993 to 1994. Various causal mechanisms may operate in both directions, an increasingly large informal economy causing more inequality due to falling tax revenues and weakened social safety nets, and increasing inequality ca using more informal activity as social solidarity and trust decline. (C) 20 00 Academic Press.