Samaranayake, D.I.J.Dayaratna-Banda, O.G.2025-11-212025-11-212015-09-23Peradeniya Economics Research Symposium (PERS) -2015, University of Peradeniya, P 17-2523861568https://ir.lib.pdn.ac.lk/handle/20.500.14444/6930Introduction Economists and policy makers still have a series of issues when accounting all unobserved market fractions in a challenging market economy. These challenges get worse within complex market structures in developing economies. One of the challenges is the expansion of unofficial and hidden economic activities which is generally known as the ‘Shadow Economy’ (SE). It includes economic activities which fall outside of the government accounting and represents some form of unofficial economy and a part and parcel of criminal and informal transactions. Schneider (2004) illustrates an increasing trend for the size of shadow economy in Sri Lanka between 1999-2003 periods and it was 45.9% of average. However, Schneider et al. (2010) estimate 43.9 % of SE as an average from 1999 to 2007. Moreover, their results demonstrate a decreasing trend in the relative size of SE over the years. However, the relative proportion of the SE still seems to be a problem in Sri Lanka. The affiliation between SE and unemployment rate also an identical matter considered by number of researchers. According to Alanon and Antonio (2005), high rates in unemployment encourage more individuals to find a job in the SE. On the other hand there is also a possibility to limit the job opportunities in the SE due to very high unemployment levels. In Dell’Anno and Solomon (2008), there was positive relationship between unemployment rate and the SE for the countries they use in the study. The empirical results used by Davidescu and Dobre (2012) mention that there is a strong evidence of uni-directional causality1 running from unemployment rate to SE at 1% level for U.S.A. This study basically attempts to estimate the Sri Lankan Shadow Economic activities as a percentage of official estimates by using unemployment rate as a key proxy, while revolving the wheel of non-clarified zones and market functions through overstepping into the traditional official estimates.en-USShadow EconomyUnemployment RateMIMIC ModelsOkun’s LawArticle