Is it hurting U.S. economic strength?
In the wake of the 2007-09 financial crisis, the underground sector has become a sizable part of the U.S. economy – perhaps as much as 10 percent. Many policymakers believe off-the-books work retards growth by denying tax revenues to governments, depressing wages, hurting competition and leaving workers vulnerable to abuse. Others argue that it’s a wash because a big share of any earnings go back into the economy as spending. They also see potential benefits: Workers gain flexibility and independence, and startups get breathing room. Currently, several states are cracking down on underground work as they face budget crunches. Economists, however, are divided over the potential impact of President Trump’s policies. Some say his tougher stance on illegal immigration will push more work underground, but others say his plans to reduce regulation and cut taxes could lead to a contraction of the informal economy.
Among the key takeaways:
Informal economies tend to be bigger in developing countries and to shrink as societies modernize.
Some economists see the underground sector as a nursery of future economic growth.
Unregulated or unlicensed work can give businesses that cut corners an unfair market advantage, penalizing employers and employees who play by the rules.
Resources for Further Study
Rogoff, Kenneth S., “The Curse of Cash,” Princeton University Press, 2016. A Harvard economist suggests the best way to reduce the shadow economy – both legal and illegal – is by phasing out American currency.
Servon, Lisa, “The Unbanking of America: How the New Middle Class Survives,” Houghton Mifflin Harcourt, 2017. A University of Pennsylvania professor investigates why so many Americans no longer put their money in banks.
Venkatesh, Sudhir, “Floating City: A Rogue Sociologist Lost and Found in New York’s Underground Economy,” Penguin Books, 2014. A Columbia University sociologist explores the underground economy that connects the rich and poor in New York City.
Capps, Robert, “Why Black Market Entrepreneurs Matter to the World Economy,” Wired, Dec. 16, 2011, http://tinyurl.com/
Rahn, Richard, “New Underground Economy,” The Washington Times, Dec. 9, 2009, http://tinyurl.com/
Tucille, J.D., “Millions of Americans Who Avoid Banks Offer a Peek at the Underground Economy,” Reason, Sept. 15, 2015, http://tinyurl.com/
Zumbrun, Joshua, “More Americans Work in the Underground Economy,” Bloomberg, March 28, 2013, http://tinyurl.com/
Reports and Studies
“Measuring the Unobserved Economy: A Handbook,” Organisation for Economic Co-operation and Development, 2002, http://tinyurl.com/
Cebula, Richard, “The Underground Economy in the U.S.A.: Preliminary New Evidence on the Impact of Income Tax Rates (and Other Factors) on Aggregate Tax Evasion,” Jacksonville University, December 2014, http://tinyurl.com/
Cooke, Oliver, et al., “The Underground Construction Economy in New Jersey,” William J. Hughes Center for Public Policy, June 2016, http://tinyurl.com/
Edwards, Ryan, and Francesc Ortega, “The Economic Impacts of Removing Unauthorized Immigrant Workers: An Industry and State-Level Analysis,” Center for American Progress, Sept. 21, 2016, http://tinyurl.com/
Feige, Edgar L., and Richard Cebula, “America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.,” Crime, Law and Social Change, Vol. 57 Issue 3, April 2012, http://tinyurl.com/
Holtzblatt, Janet, and Jamie McGuire, “Factors Affecting Revenue Estimates of Tax Compliance Proposals,” Joint Working Paper of the Congressional Budget Office and the Staff of the Joint Committee on Taxation, November 2016, http://tinyurl.com/
Nava, Pedro, et al., “Level the Playing Field: Put California’s Underground Economy Out of Business,” The Little Hoover Commission, March 2015, http://tinyurl.com/
Nightingale, Demetra Smith, and Stephen A. Wandner, “Informal and Nonstandard Employment in the United States: Implications for Low-Income Working Families,” The Urban Institute, August 2011, http://tinyurl.com/
Singh, Anoop, Sonali Jain-Chandra and Adil Mohommad, “Inclusive Growth, Institutions and the Underground Economy,” International Monetary Fund Working Paper, February 2012, http://tinyurl.com/
Weber, Till Olaf, Jonas Fooken and Benedict Hermann, “Behavioral Economics and Taxation,” European Commission Taxation Working Papers, 2014, http://tinyurl.com/
The Next Step
“Underground economy accounts for 8% of GDP in 2015,” Korea Herald, Feb. 17, 2017, http://tinyurl.com/
Koehn, Emma, “More than 400 SMEs to receive visits from the ATO as it ramps up focus on Australia’s cash economy,” SmartCompany, March 7, 2017, http://tinyurl.com/
Salzano, Giovanni, and Lorenzo Totaro, “Italy Debt Tops 150% of GDP Without Underground, Illegal Economy,” Bloomberg, Oct. 14, 2016, http://tinyurl.com/
Dwivedi, Yogesh K., et al., “Demonetization could spark a new digital economy in India,” Quartz, Nov. 22, 2016, http://tinyurl.com/
Verbyany, Volodymyr, “Ukraine Wants to Go Cashless But the Black Market Rules,” Bloomberg, Feb. 15, 2017, http://tinyurl.com/
Weller, Chris, “America has the technology to go cashless, but nobody trusts it enough to use it,” Business Insider, Nov. 17, 2016, http://tinyurl.com/
Federal Deposit Insurance Corp.
550 17th St., N.W., Washington, DC 20429
Federal agency that keeps statistics on the percentage of people who don’t use banks and are more likely to be in the underground economy.
Internal Revenue Service
1111 Constitution Ave., N.W., Washington, DC 20224
The nation’s tax collection agency.
International Monetary Fund
700 19th St., N.W., Washington, DC 20431
This international organization is a good source of research on economies large and small.
Little Hoover Commission
925 L St., Suite 805, Sacramento, CA 95814
California’s independent state government oversight agency does research on the underground economy.
Organisation for Economic Co-operation and Development
1776 I St., N.W., Suite 450, Washington, DC 20006
International organization that works to promote economic policies and to alleviate poverty. Also created a handbook to help economists measure underground economies.