STEVE INSKEEP, HOST:
Hard as it may be to believe, it is Spain, not Greece that has Europe's highest jobless rate - almost one in four workers are unemployed in Spain. Official statistics are based on the number of people who register for unemployment benefits.
But as Lauren Frayer reports, Spaniards have a secret: many collect a paycheck while they're on the dole.
UNIDENTIFIED MAN: (Spanish language spoken)
LAUREN FRAYER, BYLINE: Pawn shops do a swift trade in Madrid these days. Spain's jobless rate is at an all time high and gold prices are close to record setting as well. People sell family heirlooms to agents in the street. Some pawn clerks earn cash on commission - off the books - while the government thinks they're unemployed.
One of them is a 51-year-old man who calls himself Mario Rodriguez. He won't give his real name for fear of being caught by authorities.
MARIO RODRIGUEZ: (Through Translator) It's under the table. You collect unemployment benefits and work at the same time. I do it, and there are so many other people who do too.
FRAYER: Rodriguez says if he's really lucky, he can make up to $1,300 commission in a single day - all undeclared income. But many days he earns nothing. So to make rent, he relies on the steady unemployment check he still gets every month. He knows he's breaking the law. But he says his employer encouraged him, and benefits from it too.
RODRIGUEZ: (Through Translator) The stores don't want many registered workers. Otherwise they'd have to pay social security. They'd have to pay all the fees, taxes and vacation days for them. And it helps workers too. Many people want to be paid on commission only.
FRAYER: Pawn brokers aren't the only ones milking Spain's generous benefits scheme.
At a building site downtown, construction workers wielding saws joked about how they're on the books as unemployed. Nearby, a private school teacher confessed to earning about double what he declares. Often companies pay half by check, the legal way, and half in cash, so that both employer and worker pay less tax. That type of fraud alone costs Spain at least $10 billion dollars a year. And the whole underground economy here makes up as much as 15 percent of GDP.
A quarter of all work is off the books, says economist Jose Ramon Pin.
JOSE RAMON PIN: (Through Translator) The government doesn't get any tax revenue from these people, because they're theoretically out of work. And it pays for their unemployment. Of the roughly five million unemployed people in Spain, about 400,000 are collecting benefits but working illegally.
FRAYER: This month, Spain's Cabinet passed labor reforms to address this. From now on, small companies that hire an unemployed person will get half of that person's jobless benefit as an incentive to hire them legally. The new employee will also be able to keep 25 percent of their dole money, during their first year on the job.
Another economist, Fernando Fernandez, says it's sort of like the government is bribing companies and workers to be honest.
FERNANDO FERNANDEZ: The idea of this is, OK, you hire somebody, we give you cash. Now this reduces the cost of that person to the employer, therefore you can pay a decent wage to this individual.
FRAYER: And keep another person employed in this recession.
At the bar at his seafood pub, restaurant owner Manuel Blanco says a few hundred euros from the government could make it worth his while to hire an unemployed person on the books. Not that he's averse to hiring people off the books though.
MANUEL BLANCO: (Spanish language spoken)
FRAYER: Everyone cheats here, including me, he says. Everyone, everyone, tries to pay the least possible. But every day they're making it harder.
And that's exactly what the government wants. Mario Rodriguez, the pawn broker, speaks freely about scamming the system, but then asks, half-joking, if I'm an undercover agent. You see, he's originally from Ecuador, and risks getting deported.
RODRIGUEZ: (Through Translator) It's luck you gamble with. On one hand, you're happy, because you're earning commission and unemployment. And there are so many people who do it too. But if you're discovered, you could regret it for the rest of your life.
FRAYER: For now, though, he says the payoff for cheating is just too good.
For NPR News, I'm Lauren Frayer in Madrid. Transcript provided by NPR, Copyright NPR.