Spain's unemployment may be lower due to shadow economy

The 'green shoots' thesis: less unemployment and more shadow economy

How many of Spain's four million unemployed are truly out of work? By late 2009, with the country still in recession and joblessness at peaks, an uncomfortable reading emerged against the doom-laden narrative: official figures do not reflect street reality. There were no riots, mass protests, or hunger. And if a quarter of the Spanish economy is underground —over €240 billion— much of the employment deemed destroyed by statistics would be paid without contributions.

The hypothesis has logic but also traps. It is worth separating the two.

Shadow economy: €240 billion and up to 1.5 million undeclared workers

The starting point is hard to dispute: in Spain, a quarter of the economy is underground. The self-employed organization UPA estimates that between one and 1.5 million Spaniards work undeclared, receiving pay without reporting it to the tax authorities. Added to this is a practice described as widespread in the service sector: the employer dismisses the worker, who collects the subsidy, while the difference is paid in cash. Neither the dismissal nor the unemployment is complete.

The case cited to illustrate apparent slack involves a twenty-year-old who starts receiving €420 for six months and travels to London to celebrate. Mention is also made of young people who moved from studies to construction and now return to their parents' homes. Without a mortgage, the blow is softer than the statistics suggest. But concluding that unemployment is a mirage is a leap too far. And in economics, the abyss often lies where no one looks.

Why private debt undermines optimism

Here comes the counterattack. It is true that households and businesses began reducing debt in late 2009, but the data must be read carefully. GDP fell by nearly 4% while private debt was cut by only 0.2% or 0.3%. The result, according to this calculation, is perverse: the household debt-to-GDP ratio is higher now than at the peak of the bubble.

Reducing debt is, by definition, contractionary. Every euro spent on repaying what is owed is a euro not consumed, and consumption is precisely the engine expected to drive recovery. The net wealth picture worsens the situation: since most of an average family's wealth is housing, and property prices have collapsed, the fall in that wealth is proportionally much greater than the decline in the overall economy. No one takes to the streets over accounting discrepancies. But the discrepancy exists.

Signals cited as green shoots

The optimistic side has its own numbers. In November 2009, the OECD improved its forecasts for Spain for 2009 and 2010. That same autumn, consumers regained some confidence lost the previous year, and household and corporate debt fell for the second consecutive month. For those arguing the worst is over, these are the longed-for signs of recovery.

The most tangible argument is domestic: some mortgages have reduced monthly payments by €300, a notable relief for family budgets. Households are saving as they haven't in years, and this savings is expected to fuel consumption when antiestéticar subsides. The detail, critics reply, is that this same savings is also being used to pay down debt.

The street test: busy terraces and layoffs with three months' notice

Is a packed café a thermometer for the country? Far from it. Leisure centers full of people have been seen in much poorer economies: it suffices that 10% of the population lives comfortably and tourism fills the rest of the tables. Waiting for octopus on Saturday says absolutely nothing about Monday.

The other face of this mirage arrives by registered mail. During the January 2010 slump, a company notifies an employee it will terminate their contract in April, giving three months' notice so no one can claim lack of warning. This long notice period is actually proof that the adjustment is not finished. And social canteens remain full, just as they were when the economy grew at 4%.

The risk no one rules out: from Greece to Portugal, Italy, and Spain

The sovereign debt ghost looms over the picture. The scenario discussed outlines a hypothetical Greek default that would chain-react through vulnerable eurozone economies, putting Portugal, Italy, and Spain in the crosshairs. That this narrative is extreme does not make it impossible, especially with banks that have yet to finish cleaning up their balance sheets.

One question remains unanswered: if real unemployment is much lower than official figures thanks to the shadow economy, why hasn't tax revenue suffered similarly? And if households are saving, why is public debt rising to cover the hole? These things don't quite fit together. They never do.

If black money and busy terraces are going to pull us out of this, better that the undeclared work pays taxes and the octopus contributes. For now, the only guaranteed green shoot is statistical, which sprouts every time someone tweaks the numbers.