International Comparisons of Household Saving Rates and Hidden Income

In this paper, we argue that shadow activities and different levels of marketization of household production systematically distort international comparisons of aggregate gross household saving rates (HSRs): Higher shares of hidden income increase observed HSRs. Panel data for 18 (24) OECD-countries covering a period of a decade show that gross HSRs are positively related to the degree of corruption (used as a proxy for the propensity to shift economic activities into the shadow) and to the share of income from property and self employment. At the same time, gross HSRs are negatively related to the female employment rate, the ratio of indirect taxes to direct taxes, and to the tax wedge. One plausible story behind these phenomena might be that unobserved consumption and wages in the shadow labor market induce an upward bias in observed HSRs and profit shares, while the price level effects of a higher share of indirect taxes and a ‘welfare state’ effect lower observed HSRs.