The role of refugees in the underground economy of the European Union

Mihai Mutascu,Scott W. Hegerty

doi:10.2478/izajodm-2022-0002

Abstract

AbstractThis paper explores the impact of refugees on the size of the underground economy in 28 European Union countries over the period from 1998 to 2017. It applies a nonlinear methodology by employing dynamic panel threshold estimations. The main findings uncover a nonlinear connection between refugees and the informal economy with an inverted V-shape and a different magnitude of effects depending on the share of the refugee population. The underground economy is stimulated at a low level of refugee inflows (where immigrants make up <0.572% of the total population). Large inflows compress the underground economy, which increases competition in the labor market based on lower labor costs. Economic growth and international trade play a crucial role in reducing the size of the informal economy. Equally importantly, coherent unemployment policy and adequate regulation of illegal immigrants support this process.

Highlights

In recent years, many European Union (EU) member countries have been confronted with inflows of migrants, most of whom invoke refugee status
As the first step of analysis, the variance inflation factors (VIF) tests for detecting multicollinearity are performed by considering all determinants
This study explores the impact of refugees on the size of the underground economy in all 28 EU countries, for the period 1998–2017, using a dynamic panel threshold approach

Summary

Introduction

Many European Union (EU) member countries have been confronted with inflows of migrants, most of whom invoke refugee status. This demographic movement has generated heated debates, in the sociopolitical environment and among researchers. The inflow of both legal and illegal immigrants modifies the aggregate size of an economy, influences the level of wages and the labor force participation rate, generates revenue inequalities in respect to native population, and affects the net fiscal burden (Becker and Ferrara, 2019; Verme and Schuettler, 2021). 2) stipulates that “refugees have the legal right to participate in the labour market on equal terms as native-born residents, and the barriers they face may be of a practical nature.”. At the level of EU, the “Mutual Learning Programme Peer Review” (European Commission, 2016, p. 2) stipulates that “refugees have the legal right to participate in the labour market on equal terms as native-born residents, and the barriers they face may be of a practical nature.” Noteworthy is that in his or her first step to being officially recognized as a refugee, an asylum-seeker has the right to work no later than 9 months after filing the application

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Conclusion