THE UNDERGROUND ECONOMY IN SPAIN - AN ALTERNATIVE TO UNEMPLOYMENT

This paper analyses the factors which determine whether an individual works in the formal sector, in the informal sector, or remains unemplo yed in the Spanish labour market. We highlight the implications of hig h unemployment on an individual's decision to work in the underground economy. We postulate that an individual decides (or is chosen) whethe r to work in the formal sector or not in a first stage and, if not, in a second stage decides whether to work in the underground sector or t o remain unemployed. We estimate a bivariate probit model which contro ls for selectivity bias in the second stage. The result indicates on t he one hand, that heads of household, who benefit more from social sec urity provisions obtained in formal sector jobs, are more likely to wo rk in such sector than others. Besides, demand restrictions seem to op erate as well - individuals with higher education have easier access t o the formal sector. On the other hand, among those who do not work in the formal sector, the probability of working in the informal sector relative to being unemployed is higher among those whose head of house hold works. For females, the probability of staying unemployed (relati ve to working in the informal sector) increases with education, sugges ting that highly educated women prefer to search for a formal sector j ob rather than to work in the underground economy. We also examine the job search behaviour among the informal sector workers.