Revisiting the Relationship between Shadow Economy and the Level of Unemployment Rate. A SVAR Empirical Ivestigation for the Case of United States

Keywords

shadow economy, unemployment rate, MIMIC model, Structural VAR, United States

Abstract

The paper analyses the relationship between shadow economy and unemployment rate using a Structural VAR approach for quarterly data during the period 1982-2011. The size of the shadow economy as % of official GDP is estimated using a Structural Equation Approach with quarterly data for the period 1982-2011.Thus, the shadow economy is modeled like a latent variable using a special case of the structural equation models-the MIMIC model. His dimension is decreasing over the last two decades. The relationship between the two variables is further tested by imposing a long-run restriction in the Structural VAR model to analyze the impact of the shadow economy to a temporary shock in unemployment. The impulse response function generated by the Structural VAR confirms that in the short-run, a rise in the unemployment rate in formal sector will lead to an increase in the number of people who work in the shadow economy.

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