The Impact of Unemployment Rate on the Dimension of Shadow Economy in Spain: A Structural Equation Approach

The paper uses annual data for the period 1970-2007 in order to estimate the size of Spanish shadow economy. In view to do so, the shadow economy is modelled like a latent variable using the structural equation model(SEM). The model includes tax burden, social benefits, subsidies, government employment, self-employment and unemployment rate as main causes of shadow economy and the results indicates that the size of informal sector oscillates between 22% and 18% of GDP in the last ten years. Investigating the relationship between the shadow economy and unemployment rate a positive relationship is marked out between this two variables.