Impact of Shadow Economy on Quality of Life: Indicators and Model Selection

The purpose of the study was to examine the effect of shadow economy on the level and quality of life. It was supposed that shadow economy effects positively on the level of life (as shadow income increased total revenues). But it can impact negatively on the quality of life. The relationship between growth of life level and quality of life depends from the level of the shadow economy. Some of studies demonstrate the link of shadow economy with the separate quality of life indicators. However, in that cases, the quality of life is the casual variable, witch changes leads to the changes in the latent variable (the shadow economy). Our task is to determine the reverse effect - the shadow economy on the quality of life. At the initial stage of our analysis, the original sample of 150 countries was divided into 5 groups, according to the shadow economy size. Than the average values of each indicator for each cluster was calculated. Next, the determination a regression equation for each cluster and for general sample was done. For this purpose we use averages for each indicator for the period of 1999-2007. As a result of regression analysis, we found that «life expectancy at birth» and «Children in-school rate» are significant for each cluster and for the whole sample. The level of life increases according to the shadow economy's growth. In the same time, life quality indicators which reflects a long and healthy life and access to knowledge - decreases. The regression coefficient increases with the growth of the shadow economy. Our results demonstrate the correctness of the hypothesis about interrelationship between shadow economy and life quality.