The Shadow Economy in Portugal: An Analysis Using the MIMIC Model

The purpose of this working paper is to identify the main factors that are at the origin of the Shadow Economy in Portugal, and to analyze its evolution over the period between 1977 and 2011. For the econometric analysis we used the Structural Model of Multiple Indicators and Multiple Causes - MIMIC, which was developed by Jöreskog, Karl G. and Arthur S. Goldberg (1975). The Structural Model of Multiple Indicators and Multiple Causes (MIMIC) is a special case of the models of structural equations (SEM – Structural Equation Models) allowing the specification of statistical relationships between causal variables (observed) and latent variables (non-observed), which in turn affect, in an indirect way, a set of observed indicators. The conclusion is that, among the selected causal variables in this working paper, the unemployment rate and the subsidies granted to enterprises are the ones that contribute the most to the evolution of the Shadow Economy. It is also concluded that the share of the Shadow Economy in Portugal, during the period under review, had a sharp decrease between 1997 and 2000, from about 52% to 13.4% of the GDP. Since 2001 the Shadow Economy has been rising again, accentuating its growth rate after 2007, and it reached a peak of 24.2% of the GDP in 2011.