Reflects the Hidden: Measuring Sri Lankan Shadow Economy

Abstract

This study refines both theoretical and pragmatic basis in estimating the size of shadow economy in Sri Lanka. Theoretical investigation had noticed a possibility of use the rate of underemployment as a determinant to measure the size of shadow economy. Further it reveals that the relative magnitudes of job finding rate (f) and devaluation in job separation rate (f*) can change the direction of relationship between the rate of underemployment and the size of shadow economy. Empirical investigation with two fitted MIMIC models; MIMIC 5-1-2a and MIMIC 7-1-2 and Benchmark calculations derive a series of average values for Sri Lankan shadow economy for the period 1990-2015. Calculations for both models tend to decrease from 40-50 percent of GDP. Further comparisons express a strong positive relationship between shadow economy with both underemployment and self-employment.