1. August 9, 2012
Ave. Domenech 113, Hato Rey, Puerto Rico, 00918-3501 Tel. (787) 751-1675 • Fax (787) 767-2117
Apartado 12144, San Juan, Puerto Rico, 00914-0144 e studiostecnicos@estudios-tecnicos. c o m

2. Table of Content
Background on the economy
Estimates of the size of the informal economy: Introduction
International comparisons
Estimates
The informal economy and personal consumption
Sources consulted
2

3. Background on the economy …
• As in the case of other Annual Average Growth of Real GNP: Puerto Rico and
economies, the Puerto Rican the U.S. 1970 a 2011*
Average for period:
economy has not been P.R. 2.0%
4.0% U.S. 2.8%
inmune to the global 4.0% 3.6% 3.7%
3.4%
3.0% 2.9% 2.9%
recession, made more 2.4%2.6% 2.4%
2.2%
2.5%
pronounced by structural 1.8%
1.2%
problems. 0.7%
• Compared to previous
decades the local economy P.R. U.S.
-1.5% -1.5%
has “decoupled” from that of 1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05 2005-10 2011
the US during the second Sources; P.R. Planning Board; Statistical Appendix, various years; U.S. BEA. * U.S. data on P.R.'s fiscal year basis.
half of the decade.
Annual Growth of Real GNP Per Capita and Personal
• So far the local economy is Disposable Income
4.0%
still in the downward phase
of the business cycle, with 2.0%
the recession becoming less
pronounced by 2011. 0.0%
• Real per capita income has
-2.0%
declined, although PDI has GNP per capita PDI
not as much, reflecting the -4.0%
e ff e c t o f t h e e c o n o m i c 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
stimulus funds from the US. Source: Puerto Rico Planning Board (2012). Statistical Appendix 2011. Table 1.
3

4. Background on the economy …
Unemployment Rate
• As labor markets conditions 18
deteriorate, they have an 17
impact on the size of the 16
15
informal economy. Between
14
2007 and June 2012 there 13
has been a net loss of 12
162,500 jobs (Household 11
Survey). 10
2005
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
• The unemployment rate has
increased significantly, from Source: P.R. Department of Labor
10.6% in 2006 to 15.7% in
Percent of Job Losses During Recession
2011. By June of this year it
Percent of job lost as a percent of
2.0%
fell to 13.8%, still above the
employment in peak month
0.0%
2006 level. -2.0%
-4.0%
• The labor force participation -6.0%
-8.0%
rate, which traditionally has -10.0%
been low, declined further, -12.0%
-14.0%
from 47.2% in 2006 to 39.6% -16.0%
in June. -18.0%
-20.0%
• The employment rate has 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72
Number of months after peak month (April 2006)
also fell, from 42.3% in 2006 Source: P.R. Department of Labor, Household Survey. To June 2012.
to 34.1% in June.
4

5. Estimates of the size of the informal economy
Introduction
The informal or underground economy in Puerto Rico has been the subject of study since the
early 1980’s. As in the case of similar studies worldwide, different approaches and areas were
measured, mostly that of tax evasion of individuals.
The most recent studies on the subject are those undertaken by Estudios Técnicos, Inc. (ETI)
in 2004 and 2010. The first study covers the period 1980-2002, while the second study extends
it to 2009. About the same time, two comparative studies by F. Schneider (2004; 2006) on the
size of the shadow economy worldwide included Puerto Rico for the first time, among Latin
America and the Caribbean economies. The studies applied two methods: the Dynamic
Multiple Indicators Multiple Causes approach, and that of currency demand, for the period
1999-2003. In tables 1 and 2 below, we present a comparative summary of the estimates of
ETI, Schneider, and of other studies by country and region, including Puerto Rico.
In the first study by ETI, a basic methodological approach was used, that of differences in the
labor force participation rate. In the 2010 study, which updates that of 2004, three methods
were used: the physical inputs approach (the M. Lackó method), that of discrepancies in the
labor force participation rate, and a structural approach using MIMIC (multiple indicators
multiple causes). Another estimate (in the case of individuals) was developed, that of the tax
gap, that is, the proportion of potential tax revenues from individuals not received as a result of
informal activity (does not include the ilegal part), for the period 2000-2009. Tables 4 and 5
below, and Figure 1 presents the estimates from the different approaches by ETI.
A very important point to take into consideration, when examining and comparing estimates of
informal activity, very much emphasized in the literature, is that no single method or approach
is better than the other. Each one has its advantages and disadvantages.
5

6. Estimates of the size of the informal economy
International
comparisons
Table 1
• Tables 1 and 2 present
estimates of the size
of the informal
economy worldwide,
including Puerto Rico,
from the various
approaches used in
different studies,
mainly that of
Schneider.
• Between 1999 and
2009 on average, the
size of the informal
economy increased.
6

7. Estimates of the size of the informal economy
International
Table 2
comparisons
• Among the Latin American
and Caribbean countries the
size of P.R.’s informal
economy is below the
average for both regions.
7

8. Estimates of the size of the informal economy
Estimates
• Table 3 presents previous estimates on the size of the informal economy. The differences
reflect the different methodologies used by the analysts,
• Table 4 presents the estimates from our 2010 study. Under the three approaches, the level
of the size of the informal economy is similar, fluctuating between 23.6% and 27.2% as a
proportion of GNP in 2009. For the whole period (2000-2009) it averaged 24.2% under the
LFPR approach, and 27.1% with the other two methods.
Table 3 Table 4
Previous Estimates of the Size of the Estimates of the Size of the Informal Economy of
Puerto Rico According to Different Methods*
Informal Economy
Estimate As a % of
Study Year (US $Bb) GNP Physical
Inputs (Lackó Discrepancies
J. Stewart (1984) 1981 $1.5 12.7% Year method) in LFPR MIMIC
Booz Allen & Hamilton (1987) 1984 $2.5 17.6% 2000 24.0% 24.7% 29.5%
J. Benitez (1989) 1984 $2.9 20.4% 2001 25.6% 26.3% 27.2%
Toledo and Camacho (1994) 1976 $2.2 28.9% 2002 27.7% 25.3% 29.5%
1992 $3.7 15.6% 2003 29.5% 24.0% 29.5%
P.R. Planning Board (1998)** 1997 $4.0 12.4% 2004 30.1% 22.7% 27.1%
Julio C. Pol (2004) 2002 $6.3 14.0%
2005 29.2% 21.5% 25.3%
Estudios Técnicos, Inc. (2004) 1985 $4.3 28.8%
2006 27.6% 22.2% 26.3%
1990 $5.3 24.6%
2007 27.8% 23.4% 25.4%
1995 $6.6 23.2%
2008 25.6% 24.9% 24.3%
Note: The estimates by Stewart and P.R. Planning Board consider
2009 23.6% 27.2% 26.6%
income from the legal and ilegal activities in the informal economy.
** Applying the proportions from Stewart study. Source: Estimates by Estudios Técnicos, Inc. (2010).
* As % of GNP.
LFPR = Labor force participation rate.
8

9. Estimates of the size of the informal economy
Estimates
• In monetary terms (nominal prices), the estimated value of the production of the informal
sector fluctuated between $12,654 and $14,200 millions during the period 2000-2009.
Table 5
Estimates on the Size of the Informal Economy
Monetary Value of Production ($US Mm)
Physical Inputs Discrepancies in
Year (Lackó method) LFPR MIMIC
2000 $9,940" $10,230" $12,218"
2001 $11,276" $11,584" $11,981"
2002 $12,485" $11,403" $13,296"
2003 $14,006" $11,395" $14,006"
2004 $15,263" $11,511" $13,742"
2005 $15,696 $11,557 $13,599
2006 $15,658 $12,481 $14,921
2007 $16,547 $13,928 $15,118
2008 $15,751 $15,382 $14,951
2009 $15,062 $17,070 $16,945
Average: $14,168 $12,654 $14,078
Source: Estimates by Estudios Técnicos, Inc. (2010).
LFPR = Labor force participation rate.
9

10. Estimates of the size of the informal economy
Estimates
• An estimate of the tax gap in the case of individuals was developed as a function of the
size of the informal economy, based on the estimates derived from the discrepancies in the
LFPR approach. The gap is defined as the proportion of the potential tax revenues from
individuals not received by the governmen as a result of their informal activity (does not
include the ilegal part).
• The tax gap, as a percentage of the tax responsability of individuals fluctuated, from 25.9%
in 2000, amounting to $581.0 million, to 26.9% in 2008, averaging 25.1% during the
period.
Figure 1
Tax Gap Estimates
$717.7 $710.4
$685.5 $685.9
$663.8
$619.7 $617.7 $621.8
$581.0 $593.7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Estimates by Estudios Técnicos, Inc, (2010) using tax data from the Treasury Department.
10

11. Estimates of the size of the informal economy
The informal economy and personal consumption
• There are no estimates of the impact of the size of the informal economy on personal
consumption. Nevertheless, the gap between income and spending can give an idea as to
how that difference might be covered.
• In P.R. transfers from the US goverment are an important source of income for individuals
and families, representing about 27% of personal disposable income. These transfers tend
to mitigate the effects of declines in regular income.
• As presented before, while real GNP per capita fell an average of -2.0% during the current
recessión (2007-2011), PDI maintained a modest real growth of 0.7%.
• On the other hand, the gap between PCE and AFI (which already includes US transfers)
has increased steadily, giving an idea as to how that gap might be financed through other
sources of income.
Figure 2
Average Family Income and Personal
Consumption Expenditures (Fiscal Years)
$US th's
$60,000
$55,000
$50,000
$45,000
$40,000
Average Family Income
$35,000 PCE
$30,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Puerto Rico Planning Board (2012). Statistical Appendix 2011. Table 1.
11

12. Sources consulted
• Autoridad de Energía Eléctrica de Puerto Rico (2010). Serie facturación mensual consumo de energía eléctrica residencial.
Department of Statistics and Forecasts (July 8th).
• Alejandro Portes y William Haller (2004). La Economía Informal. CEPAL, Serie Políticas Sociales #100, División de Desarrollo
Social, Santiago de Chile (November). At www.eclac.org/publicaciones/xml/5/20845/sps100_lcl2218.pdf.
• Booz-Allen & Hamilton (1987). Final Report on the Tax Reform Program. Prepared for the Department of the Treasury,
Commonwealth of Puerto Rico. Washington D.C. (February).
• Daniel Mitchell (2007). “The Tax Gap Mirage”, Tax & Budget Bulletin, Cato Institute No. 44 (March). At
http://www.cato.org/pubs/tbb/tbb_0306-44.pdf.
• David Giles (1998). The Underground Economy: Minimizing the Size of Government. Vancouver, The Fraser Institute, Canadá. At
www.fraserinstitute.org/.../HowtoUseFiscalSurplusUndergroundEconomy.pdf.
• David Giles y B. Johnson (1999a). “Taxes, Risk Aversion, and the Size of the Underground Economy: A Nonparametric Analysis
with the New Zealand Data.” Econometrics Working Paper EWP 9910, University of Victoria, Canadá. At
http://web.uvic.ca/econ/research/papers/pdfs/ewp9910.pdf.
• David Giles (1999b). Modelling the Hidden Economy and the Tax Gap in New Zealand. Departament de Economía, Universidad
de Victoria, Canadá (February). At http://web.uvic.ca/econ/research/papers/ewp9905.pdf.
• Department of Labor and Human Resources of Puerto Rico. Series on Employment and Unemployment. Bureau of Labor
Statistics. Various years.
• Estudios Técnicos, Inc. (2004). La Economía Informal en Puerto Rico. San Juan. Report prepared for the Department of Labor
and Human Resources of Puerto Rico (October).
• Estudios Técnicos, Inc. (2010). Estudio Sobre la Economía Informal en Puerto Rico. San Juan. Study prepared for the
Government Development Bank of Puerto Rico (August).
• Friedrich Schneider and Dominik Enste (2000). “Shadow Economies: Size, Causes, and Consequences,” Journal of Economic
Literature, Vol. 37 (Marzo) pp. 77-114.
• Friedrich Schneider and Dominik Enste (2001). Increasing Shadow Economies All Over the World: Fiction or Reality. A Survey of
the Global Evidence of their Size and of their Impact from 1970 to 1995. NP, mimeo. At
www.rebe.rau.ro/RePEc/rau/journl/SP07/REBE-SP07-A13.pdf.
12

13. Sources consulted
• Friedrich Schneider (2002). Size and Measurement of the Informal Economy in 110 Countries Around the World (Julio). Paper
presented at the Workshop of the Australian National Tax Center, Canberra, Australia. At
http://www.unescap.org/tid/gateway/tisgway_is.pdf.
• Friedrich Schneider (2004). The Size of the Shadow Economies of 145 Countries all over the World: First Results over the Period
1999 to 2003. Discussion Paper No. 1431, Institute for the Study of Labor, Bonn (December). At
http://www.dur.ac.uk/john.ashworth/EPCS/Papers/Schneider.pdf.
• Friedrich Schneider (2006). Shadow Economies of 145 Countries all over the World: What do we really know? (August). At
http://www.crema-research.ch/papers/2005-13.pdf
• Friedrich Schneider, Andreas Buehn and Claudio E. Montenegro (2010). Shadow Economies all over the World: New estimates for
162 Countries from 1999 to 2007. Research paper for the Word Bank study on the informal sector in the economies of Eastern
Europe and Baltic countries (January 20th).
• Guillermo Vuletin (2008). Measuring the Informal Economy in Latin America and the Caribbean. Washington, D.C., International
Monetary Fund, WP/08/102 (April). At http://www.imf.org.
• John Stewart (1984). “Notes on the Underground Economy of Puerto Rico”, Puerto Rico Business Review, Government
Development Bank of Puerto Rico, Vol. 9:4 (April).
• Julio C. Pol (2004). Estimaciones de la economía subterránea: El caso de Puerto Rico. Ensayos y Monografías No. 117,
Economics Research Unit, Department of Economics, University of Puerto Rico, Río Piedras Campus (January). At
Http://www.economia.uprrp.edu/ensayo%20117.pdf.
• Leandro Colón (2002). “La economía informal en Puerto Rico: Problemática, estimados macroeconómicos y agenda sugerida,” in
Francisco Martínez and Francisco Catalá, eds., Ensayos sobre la Pobreza en Puerto Rico, San Juan, Publicaciones
Puertorriqueñas.
• Puerto Rico Planning Board (1998). Algunas consideraciones sobre la economía subterránea en Puerto Rico. Informe
Económico al Gobernador 1997, San Juan, Bureau of Economic Analysis, chapter VI.
• Puerto Rico Planning Board (2012). Statistical Appendix to the Economic Report to the Governor, 2011. San Juan, Bureau of
Economic Analysis. At Apéndice Estadístico, http://www.jp.gobierno.pr/
• Wilfredo Toledo and Wilfredo Camacho, “Evasión contributiva y economía informal en Puerto Rico,” in Suphan Andic and Ramón
J. Cao, eds. (1996), Estudios de Base para la Reforma Contributiva, Río Piedras, University of Puerto Rico Press, chapter. 8.
13