INFORMALITY AS BOTH A BUFFER AND BARRIER: UNDERSTANDING THE BIDIRECTIONAL RELATIONSHIP BETWEEN THE SHADOW ECONOMY AND UNEMPLOYMENT IN UZBEKISTAN

Abstract

This study examines the dual role of the shadow economy in shaping unemployment dynamics in Uzbekistan, highlighting how informality functions simultaneously as a buffer that absorbs surplus labor and as a barrier that restricts long-term formal employment growth. While the shadow economy provides temporary income opportunities for workers who cannot access the formal sector, it also undermines productivity, discourages enterprise expansion, distorts wage structures, and reduces fiscal revenues needed to support job creation. Drawing on theoretical perspectives and country-specific trends, the paper conceptualizes the bidirectional relationship between unemployment and informality, showing how each reinforces the other in a self-perpetuating cycle. The findings suggest that reducing unemployment in Uzbekistan requires not only stimulating formal job creation but also addressing structural drivers of informality through digitalization, stronger enforcement, skills development, and targeted incentives for formalization.