Economic growth and unemployment exhibit an ambiguous relationship – according to empirical studies. This ambiguity can …, unemployment may be absorbed by underground firms, which adopt backward technology, at the cost of reduced economic growth …. Alternatively, unemployment diminishes because productivity grows by employing workers who prefer to become skilled, and thus not to …

A matching model will explain both unemployment and economic growth by considering the underground sector. Three … between underground employment and unemployment, and (iii) between growth and unemployment. Key assumptions are that … contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low. …