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The impact of the shadow economy on unemployment

Author

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  • Narimen Rdhaounia
  • Saoussen Ouhibi

Abstract

This paper examines the causal relationship between the shadow economy and unemployment in Tunisia, focusing on the direction of causality and its theoretical foundations. Drawing on labor market segmentation and the dual economy model, the study argues that informality can strain the formal labor market by diverting labor supply, reducing formal job opportunities, and reinforcing unemployment. Using monthly data from 1991–2017, an Autoregressive Distributed Lag (ARDL) model estimates both short- and long-run effects. Results show a significant positive long-run impact of the shadow economy on formal unemployment, highlighting structural constraints imposed by informality. Policy implications include formalizing economic activities, encouraging informal enterprises to transition to the formal sector, promoting decent job creation, and strengthening labor protections. This research provides country-specific empirical evidence on Tunisia’s informality–unemployment nexus, clarifies causality direction, and offers actionable insights for addressing unemployment through regulation and formalization of the shadow economy.

Suggested Citation

  • Narimen Rdhaounia & Saoussen Ouhibi, 2026. "The impact of the shadow economy on unemployment," EERI Research Paper Series EERI RP 2026/08, Economics and Econometrics Research Institute (EERI), Brussels.
    • Handle: RePEc:eei:rpaper:eeri_rp_2026_08
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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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