The effect of population ageing on the shadow economy: evidence from China

Population ageing is reshaping economic structures worldwide, yet its implications for informal economic activities remain insufficiently understood. Leveraging panel data from 283 prefecture-level cities in China during 2010–2020, this study investigates how population ageing affects the regional shadow economy and uncovers the mechanisms driving this relationship. The results demonstrate that population ageing significantly expands the shadow economy, and this effect displays pronounced regional heterogeneity, being stronger in eastern China as well as in provincial capital and border cities. Mechanism analysis indicates that population ageing suppresses regional investment and formal-sector employment opportunities while increasing tax and social security burdens, collectively driving capital and labour into the shadow economy. We further find that broader social security coverage can mitigate these effects, highlighting the importance of robust welfare policies in addressing the economic challenges associated with demographic transitions. By providing city-level empirical evidence from a large and diverse set of regions, this study contributes new insights into the demographic determinants of informal economic activity and offers policy implications for curbing shadow-economy expansion in ageing societies.