1. Senior Economist, Statistics Canada
The underground economy in Canada, 1992 to 2011
Meeting of the Group of Experts on National Accounts
Charles Morissette,
Senior Economist, Statistics Canada
May 2014, Geneva

2. Statistique Canada • Statistics Canada
Section 1 Canadian NOE estimates in relation to international measurement framework
Statistique Canada • Statistics Canada
20/08/2019

3. 1.1 International analytical framework for the non-observed economy (NOE)
Chart 1 Analytical framework proposed by the OECD
Non-observed economy (NOE)
Hidden sector
Illegal sector
Informal sector
Household production for own final use
Deficiencies in basic data collection program
Measuring the Non-Observed Economy: A Handbook, OECD, IMF, ILO and CIS STAT, 2003.
Statistique Canada • Statistics Canada
20/08/2019

4. 1.2 Operationalization of the Canadian framework
Chart 3 Analytical framework and operationalization used by Statistics Canada
Underground economy
Hidden sector
Under-reported and non-reported activities
Skimming
Construction-related
Hidden rent
Undeclared tips
Export-related
Illegal sector
Unlicensed operation
Tobacco
Alcohol
Illegal operation
Illegal drugs
Prostitution
Informal sector
Home-based child care services
Private household services
Other personal care services
Direct sales of agricultural products
Other industries
Operationalization
Deficiencies in basic data collection programs are considered out of scope
Focus is only on what is within the CSNA production boundaries
In Canada, some activities that are productive in an economic sense are excluded from the official measure of the GDP, even though international bodies recommend their inclusion. For example,
Drug trafficking
Prostitution activities
The framework can be mapped to the NOE framework
Statistique Canada • Statistics Canada
20/08/2019

5. Section 2 Methodologies
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6. 2.1 Measurement approaches
Three measurement approaches were used
Upper bound method
Supplementary data
Data confrontation analysis
Two approaches were not used
Special surveys on UE (none exist)
Macroeconomic modelling
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20/08/2019

7. 2.2 Major assumptions of the study
Small businesses are more likely to participate in underground economy activities than larger ones
Unincorporated businesses are more likely to engage in underground economy activities than incorporated businesses
Non-profit and general government sectors do not take part in underground economy activities
Corporate investment in non-residential structures, machinery and equipment as well as intellectual property is not subject to underground activity
This does not mean that large businesses, non-profit organization and general government don’t engage in UE but that these cases are “exceptional”
Since all assumptions are upper bound, “exceptional case” would probably fall within the current NOE estimates.
Statistique Canada • Statistics Canada
20/08/2019

8. 2.3 For tobacco, alcohol and hidden rent, supplementary data are used
Tobacco and alcohol
Hidden rent
“Real” consumption is estimated in terms of volume, from which legal sales are subtracted. The “street” value is used to yield an estimate in nominal terms
Sources: Police survey, household surveys and corporate annual reports
The value of hidden rent is calculated from an estimate of the undercoverage of households in the 1991 and 1996 censuses and a series of average dwelling prices (adjusted by a quality factor).
Sources: census, census undercoverage studies, household surveys
Statistique Canada • Statistics Canada
20/08/2019

9. Statistique Canada • Statistics Canada
2.4 For construction and renovation, the upper bound and skimming are combined
New construction
Renovations
By comparing data on materials (measured goods), income reported by businesses (low) and the value of building permits (undervalued), upper bound undervaluation rates were determined by dwelling type.
Sources: Tax data, building permits and national accounts data
By comparing renovation permits with the results of a household survey, upper bound adjustment factors were determined by dwelling type.
Sources: Renovation permits, household surveys and national accounts data
Statistique Canada • Statistics Canada
20/08/2019

10. 2.5 Skimming, informal sector and professional services
Tax data on businesses’ revenues are the starting point.
Converted according to household expenditure categories (using the input-output tables)
Classified by industry code
In each case, upper bound skimming rates are applied
Estimates are compared to household survey estimates
Estimates are also produced by industry
Assumptions
Only small businesses
Different rates for incorporated and unincorporated businesses
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20/08/2019

11. Statistique Canada • Statistics Canada
2.6 Tips and exports
Unreported tips
Exports
Based on estimates of skimming in the accommodation, taxi and food services industries, the usual tipping rates are applied
Note that these tips are added to those already estimated in the GDP
Sources: skimming, tipping rates from the Input-Output Tables
Contraband alcohol and tobacco
An underestimate of 5% of exports of goods is added in export sectors not governed by international prices, and of 10% for exports of services to firms not subject to regulation
Sources: Estimates on tobacco and alcohol and national accounts data
Statistique Canada • Statistics Canada
20/08/2019

12. 2.7 Underground economy by industry
On the one hand, the preceding estimates are broken down by industry
On the other hand, we use individual tax data that track revisions in businesses’ returns following an audit. These data are used to derive a rate of change in tax assessments by industry
The two sources are compared and reconciled
Statistique Canada • Statistics Canada
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13. Statistique Canada • Statistics Canada
Section 3 Results
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14. 3.1 Characteristics of measures of the underground economy in Canada
UE estimates are calculated using three approaches to measuring the GDP
Expenditure-based approach (nominal and real)
Income-based approach
Approach by industry
1992 to 2011 time series for Canada
Base on upper bound assumptions and exhaustive use of audited tax data
Statistique Canada • Statistics Canada
20/08/2019

15. 3.2 Interpretation of Canadian estimates on underground economy
The Canadian UE estimates represents the upper bound value of what could be missed from official GDP due to the non-observed activities.
Due to the way CSNA estimates are built, some of the NOE estimated is already included in GDP but the exact proportion is unknown.
Statistique Canada • Statistics Canada
20/08/2019

16. Statistique Canada • Statistics Canada
3.3 Change over time in the underground economy as a proportion of the official GDP - Canada
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17. Statistique Canada • Statistics Canada
4. Future developments
Short term
Improve the timeliness of publication
Produce estimates for the Canadian provinces and territories
Long term
Add estimates for other legal, unlicensed activities (music or software piracy, etc.)
Add estimates for illegal sectors (narcotics, solicitation for purposes of prostitution, etc.)
Clarify the portion of UE already included in the official GDP
Incorporate some portions of UE in the official measure of GDP
Statistique Canada • Statistics Canada
20/08/2019