Abstract
The paper investigates the relationship between underground activities and financial deepening. We find a strong negative impact of the share of irregular employment on outstanding credit to the private sector. A shift of 1 per cent of employees from regular activities to irregular ones corresponds to a decline of 1-2 percentage points in lending and of 0.3 percentage points in outstanding credit to households, both expressed as ratios to GDP. By analysing the 2002 regularisation programme for immigrant workers, we also find that irregular labour has a negative effect on banks' decisions entry into local credit markets.