The Effect of Shadow Economy on Human Capital in Tunisia: An Ardl Bounds Test Approach

ABSTRACT: The research for this paper was conducted in order to investigate the effect of the shadow economy on human capital in Tunisia using time series data between 1991 and 2017. The study objectives were achieved by analyzing annual time series data extracted from the World Development Indicators and the Central Bank of Tunisia. While the intricate relationship between the shadow economy and human capital is well-established in the literature, country-specific analyses, especially for developing nations like Tunisia, remain scarce. This research meticulously addresses this critical gap by focusing on the unique socio-economic landscape of Tunisia and the interplay between formal and informal sectors. The short- and long-run impacts of the shadow economy on human capital remain important issues in the empirical and theoretical literature, particularly in country-specific contexts. However, they have yet to receive significant research consideration. To this end, the paper employs the ARDL (Autoregressive Distributed Lag) analysis method, widely regarded as an advanced and robust analytical model for exploring relationships in time series data. The ARDL approach provides nuanced insights into both short- and long-term dynamics, making it especially relevant for this study. The findings reveal that the shadow economy exerts a significant positive long-run impact on human capital in Tunisia. This suggests that informal economic activities may provide opportunities for skill development and human capital accumulation over extended periods. Conversely, in the short run, the shadow economy negatively impacts human capital, implying that individuals with higher education levels are less likely to engage in informal sector activities during the early stages of development. Additionally, the analysis indicates that foreign direct investment (FDI) and life expectancy are positively and significantly correlated with human capital, highlighting the role of foreign capital and improved living conditions in fostering human development. Interestingly, GDP also shows a significant positive impact on human capital, but the coefficient on legal frameworks is statistically insignificant. This finding suggests potential deficiencies in enforcement mechanisms or legal structures related to the shadow economy. Hence, based on these results, Tunisian policymakers are urged to implement comprehensive strategies to enhance human capital through targeted education and strategic programs. Moreover, policies should aim to increase the attractiveness and competitiveness of the formal sector, reducing reliance on the shadow economy.