| Summary: | <p>The availability of official time series of Italian underground employment and VAT tax evasion for the period 1980-2004 allow us to investigate empirical1y the long- and short-run characteristics of two components of the Italian Non Observed Economy (NOE). The analysis focuses on a time span during which major labour market and fiscal reforms occurred in Italy, with an evident impact on long-run dynamics of both underground employment and tax evasion. Our investigation pointed out several interesting short-run regularities. The cyclical behaviour of the non-regular labour input indicates that the resources allocated to the underground economy are mostly motivated by flexibility requirements. Moreover, the dynamic adjustments of employment between the regular and underground market, are inextricably tied one to each other over the cycle, highlighting a reallocation mechanism among labour inputs or a labour drag effect. As to the size of the VAT evasion, its short term dynamic suggests a strategic behaviour by taxpayers, aiming to smooth tax liabilities expressed as a share of revenues.</p><p> </p><p> </p><p><strong>JEL Codes:</strong> E26; E32; H20; H26; J21</p><p> </p>
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