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Spain's underground economy is worth 20% of its GDP

Posting in Government

Spain's official unemployment rate, just below 30 percent, has remained excruciatingly high and has plagued the country's economy for years. But according to a new study by Spain's Foundation for Financial Studies, it tells only part of the story.

The country's underground economy -- either illegal or unreported activity -- is actually worth fully 20 percent of Spain's GDP and employs more than a million people. Within the European Union, only Italy can boast a more robust illicit economy (21 percent of GDP).

This unreported activity, which circumvents tax and labor laws, varies greatly across industries. In Spain's financial industry, rates of illegal activity are low, at less than 10 percent, whereas in the construction industry, full 35 percent of activity is illegal.

This could be considered good news and bad news. On one hand, more than 1 million Spaniards are thought to be employed in the country's informal sector. That means that the country's actual unemployment numbers (which have remained stubbornly high since the start of the euro zone crisis) may in reality be lower than previously thought.

The flip side is that businesses and individuals that operate illicitly are not subject to -- or protected by -- labor laws, creating opportunities for abuse. They are also not paying taxes. The study estimates that the government is losing as much as $26 billion in uncollected taxes -- money the state could certainly use in the midst of a prolonged fiscal crisis. The artificially high unemployment rate also makes the country even less appealing to foreign investors.

More than anything, this should indicate to Spain's leaders that an opportunity exists to try and bring this illicit activity into the formal economy, whether by lowering tax rates or by other means. If nothing else, it suggests Spain's economic activity is stronger than previously thought.

Photo: Wikimedia Commons/Frank Vincentz

via [Quartz]

— By on July 16, 2013, 9:47 PM PST

Channtal Fleischfresser

Contributing Editor

Contributing Editor Channtal Fleischfresser has worked for The Economist, WNET/Channel 13, Al Jazeera English, Wall Street Journal and Associated Press. She holds degrees from the University of Pennsylvania and the Columbia University Graduate School of Journalism. She is based in New York. Follow her on Twitter. Disclosure