The Causal Relationship Between Unemployment Rate and Underground Economy in Iran

Abstract

The paper investigated the causal relationship between IRAN underground economy and unemployment rate with Toda-Yamamoto approach for annual data during the period 1973-2012. The size of the underground economy measured as official GDP is estimated using a Multiple indicator- Multiple Causes (MIMIC) approach. The size of the underground economy has been associated with increased over the four decades, However has fluctuations in the first two decades but shows quite ascending trend in the last two decades. The empirical results point out that there is strong evidence of uni-directional causality running from unemployment rate to underground economy.