The main objective of this research paper is to investigate the relationship between the informal economy and unemployment in the countries of the Western Balkan region over the last two decades. In this regard, since there are no official instruments that will be able for this research to use as official data, the
MIMIC approach has been used as an essential method for the measurement of the informal economy. The dependent variables are; employed business freedom index, economic freedom index, tax burden, unemployment rate and size of government, while as indicative variables are set the following
variables: currency (M0 / M1) where based on the MIMIC method is representing the indicator that is set to be fixed in the preliminary value, labour force participation rate and GDP growth rate per capita.
Furthermore, the results of the MIMIC model imply a positive and significant effect of the informal economy on the unemployment rate for the case of Western Balkan countries for the period 2000 – 2019.
Finally, such findings highlight an important contribution to the existing empirical literature regarding the nexus between the informal economy and unemployment rate in developing countries yet do not solve a solution to the long-existing debate regarding this relationship in the developed and developing
Keywords: informal economy, unemployment, informal
sector, MIMIC, indirect approach.