Does tourism affect the informal sector?

The effect of tourism on economic growth has largely been investigated in the literature. However, it is still poorly understood about how the impact of tourism on the size of the informal economy. The present study attempts to fill the research gaps in this field, and thus applies panel regression techniques to examine the relationship between tourism development and the size of the underground economy across 96 countries over the period 2000-2007. The estimation results show that tourism exhibits a U-shaped relation with informality. Specifically, the share of informal sector first decreases in the early stages of tourism development and then increases as tourism continues. Some policy implications, limitations, and future research directions are also discussed.