Designing a System Dynamics Model of Shadow Wage Formation in Ukraine

• Main Author: Novik Alina Yu.
• Format: Article
• Language: English
• Published: Research Centre of Industrial Problems of Development of NAS of Ukraine 2020-01-01
• Series: Bìznes Inform
• Subjects: shadow wage; system dynamics; imitation modeling; shadow economy drivers; shadow flows; feedback loops
• Online Access: https://www.business-inform.net/export_pdf/business-inform-2020-1_0-pages-122_128.pdf

The formation of the shadow wage in Ukraine is a major problem and a threat to economic growth. According to different valuation methods, the shadow economy in Ukraine ranges from 35% to 54% of GDP, and the shadow wage is estimated at 18% of GDP. The general scheme for tax evasion by businesses is to informally pay cash to workers in “envelopes”, which results in a large amount of cash in the economy and, as a consequence, further opportunities for tax evasion. Despite the urgency of the current issue for Ukraine and a large number of works by Ukrainian and foreign scientists dedicated to finding positive and negative features of the existence of shadow wages, there is still a lack of research that determines the formation of shadow wages through the use of economic and mathematical tools. Based on that, a model of shadow wage formation using the system dynamics method was constructed, which takes into account such factors as the amount of cash in the economy and the size of the minimum wage. Based on the modeling results it was found that raising the minimum wage would reduce the share of the shadow component in GDP. Taking that into consideration, conclusions were drawn regarding the first objectives of government policy, which should aim at creating opportunities for economic growth and reducing the amount of cash in the economy in order to lower the size of the shadow sector in Ukrainian economy as a whole.