RELATIONSHIP BETWEEN THE UNEMPLOYMENT RATE AND THE SIZE OF THE SHADOW ECONOMY-A NONPARAMETRIC ANALYSIS OF USA DATA WITH SPLINE MODELS

The paper aims to investigate the relationship between unemployment rate and shadow economy with USA data using spline models. The shadow economy is estimated as percentage of official GDP, using MIMIC model. The size of the shadow economy (SE) is estimated to be decreasing over the last two decades. In order to evaluate the nature of the relationship between the two variables, we have estimated cubic B spline, natural cubic B-spline and smoothing models. Using an F-test, we compare the smoothing spline to a global linear fit and the results indicate a sufficiently linear relationship. Finally, we have compared the local polynomial models with the spline model; the smoothing spline model closely matches the linearity between the size of the shadow economy and the unemployment rate.