Off the Radar: Estimating the Size of the Shadow Economy in Tunisia

ABSTRACT This study estimates the size of the shadow economy in Tunisia over the period 1988–2023 using the Multiple Indicators Multiple Causes (MIMIC) model, which assesses a latent variable based on its causes and indicators. The analysis was carried out in three steps: identifying the main causes (tax pressure, unemployment, trade openness, and corruption) and key indicators (GDP growth, M0/M2 ratio, labor force participation rate); constructing a shadow economy index from the estimated coefficients of the causal variables, and calibrating it as a percentage of GDP. The results reveal an average size of 39.08%, with peaks during the 2011 Revolution (41.70%) and the COVID‐19 crisis in 2020 (46.62%), illustrating its sensitivity to shocks. The persistence of these activities in Tunisia underscores the need for structural reforms in tax, regulatory, institutional, and labor market policies to foster integration into the formal economy.