Revisiting the Latent Variable/MIMIC Model Approach to Measuring the Size of the Canadian Underground Economy
SIZE, CAUSES AND CONSEQUENCES OF THE UNDERGROUND ECONOMY, Chris Bajada and Friedrich Schneider, eds., Ashgate Publishing, UK, 2005
27 Pages Posted: 27 Jul 2007 Last revised: 26 Feb 2010
Date Written: February 24, 2010
There is considerable agreement internationally about the factors that determine the relative size of the underground economy (tax burden, regulation, enforcement, confidence in government, labour force characteristics, and morality) and that evidence of underground activity will be captured in several economic indicators (GDP, currency in circulation, and consumption rates). Until recently, however, the methods that have been employed to measure the underground economy focused on only a few causal factors, one indicator, and only produced an estimate for one particular point in time. There exists a modeling technique that treats the underground economy as an unobservable or latent variable and incorporates multiple indicator and multiple causal (MIMIC) variables. The MIMIC model uses information contained within relevant indicator and causal variables to estimate a time-path of the size of the hidden economy. In applying this estimation technique to Canada data, my results indicate that, the underground economy in Canada grew steadily relative to measured GDP over the period 1976 to 2001. The value of the broadly defined underground economy grew from about 7.6% of GDP in 1976 to about 15.3% in 2001. In real (1997) dollar terms, it increased from about $38 billion to $156 billion.
Keywords: Underground Economy, Structural Equation Model, Latent Variable
JEL Classification: C32, O17, 051
Suggested Citation: Suggested Citation