What Is the Unexpected Impact of Mandatory Gender‐Equal Pay for Work of Equal Value on the Shadow Economy?

ABSTRACT Laws mandating non‐discrimination on the basis of gender (e.g., gender‐equal pay for work of equal value) are expected to empower women, especially in employment, to achieve gender equality. We use data from 162 countries from 1995 to 2018 to provide new evidence that this law might have unexpected effects. We find that laws mandating gender‐equal pay for work of equal value appear to reduce the size of the shadow economy. On average, the shadow economy measured by multiple indicators and multiple causes (MIMIC) and dynamic general equilibrium (DGE) models reduces by 0.198 and 0.514 percentage points, respectively, in countries mandating gender‐equal pay for work of equal value. Such laws also increase male labour force participation by 0.543 percentage points. Moreover, instrumental variable estimates confirm that increased male labour force participation is the main mechanism for reducing the shadow economy. Our findings imply that laws requiring equal pay for work of equal value are not only a good actor in harmonizing the shadow economy but also create other challenges for policymakers, who need to assess whether employment laws effectively achieve their initial target of supporting disadvantaged female workers in the labour market.