Analysis of the Shadow Economy of Greece

Among the developed OECD nations and member countries of the European Union, Greece has one of the highest shares of the shadow economy from its official GDP. Therefore, it is crucial to investigate the main drivers of Greek shadow economy and implement the policies aimed for the reducing its size and keep the official sector healthy. Besides of the presence of relatively high size of the underground economy from the official GDP, Greece also has high level unemployment rate, especially after the global financial crisis in 2008 and 2009. In this regard the aim of the paper is to investigate whether the unemployment rate of Greece has any effect on the size of the underground economy or not. The paper contributes to the study of the shadow economy and its relationship with the unemployment rate, as there is very limited literature which analyzed the relationship between these two variables, let alone for Greece, which is not studied as much. Thesis is divided into two parts, theoretical and practical parts. Theoretical part will define the shadow economy and dive to further theoretical aspects of the underground activities and transactions. The methods of the estimation of the shadow economy will be discussed and summarized as well. Lastly it is crucial to note about the global trend of the shadow economy across different countries and regions. Practical part investigates the size and the development of the shadow economy from 1995 to 2015 in Greece using Multiple-Indicators-Multiple-Causes (MIMIC) approach and Pearson correlation coefficient is used to analyze the relationship between the underground economy and the unemployment rate. MIMIC model and its application is thoroughly discussed as well. It analyzes the latent variable, which is in this case is the shadow economy, by using several determinants and indicators. According to the results the mean value of the shadow economy through the chosen period was 29.9% from the official GDP. However, there is very weak to no correlation of the unemployment rate of Greece with its shadow economy.