The Empirical Analysis of the Direct Effect of Unemployment on the Shadow Economy in Iran (Money Demand Approach)

The literature of shadow economy emphasizes the role of unemployment on the growth of illegal activities. Although many studies have been accomplished about the identification of effective factors on the shadow economy growth, but there are shortages in the context of the analysis of the direct effect of unemployment rate on shadow economy empirically. The purpose of this article is to study the effect of unemployment on shadow economy directly. In this regard, first of all the size of shadow economy in Iran over the period 1976 to 2015 using money demand relation has been estimated. Then the amounts of tax burden and unemployment variables in the changes of shadow economy have been measured. The results from estimation of money demand in the framework of Autoregressive Distributed Lag show that on average 16.35 % of formal production is shadow economy activities and the rate of shadow economy to GDP has increased. there are also a meaningful and positive relationship among tax burden, unemployment and shadow economy size. unemployment rate has significant direct effect on shadow economy and also, according to findings from the decomposition of size of shadow economy to its explanatory factors, on average in the period of under review, 7% of changing shadow economy in Iran is due to changing unemployment rate directly. JEL Classifications: O17, E24, E41, C19, O53