Underground Economy Goes Main Street – 5 Implications

The U.S. “underground economy” has gone mainstream and has grown to about $2 trillion annually. That’s the number university researchers Richard Cebula and Edgar L. Feige calculated in their recent study of unreported income.

Underground economy participants now include regular everyday people..

Gone are the days when it was dominated by Tony Soprano types, criminals, and illegal immigrants.

Currently, housewives, laid off middle managers, college students, trade school graduates, lawyers and artists seem to feel no moral ambivalence and little fear about “working off the books.”

The reasons for this growing trend are many. There is a shortage of “real” jobs. The stigma attached to not having traditional types of employment went with the burst of the housing bubble. All that matters is income. Employers are more willing to pay off the books in order to duck regulations, including Obamacare. The Internet makes it easy to operate a shadow business and the implications are huge.

Here are five.

Lost Taxes

Estimates, such as by Cebula and Feige, are that the federal government recently has missed out on about $500 billion a year in taxes. With that revenue, visionaries might have been able to be more innovative with national tax policies. There is also lost tax revenue to state and local government. Those added revenues could have prevented increases in property taxes and funded better public education.

Misleading Labor Statistics

Some economists keep saying that X percentage of the labor force has given up looking for a job. The reality might be that they are employed, only what they are doing for income does not show up in any official reporting system - not an employer’s, not their own tax return. The actual unemployment rate might be lower than the 6.3% the Department of Labor reported for April 2014.

Keeping Consumer Economy Rolling

The U.S. GDP might be higher and growing faster than what government agencies have calculated. What if that $2 trillion of the underground economy had been factored in?

There is speculation that this underground cash floating around had been what kept the struggling consumer economy from collapsing during The Great Recession. It also could be why supposed jobless Millennials can purchase brand name clothes and mobile gadgets. As digital natives, there are myriad of paid tasks they can do in an online economy.

In addition, cash gets freed up because it is often less expensive to hire a housecleaner off the books for example, than a franchise service which operates on the books. Since the service is so affordable, it might be used more often than a traditional cleaner, and it drives more cash into the economy.

Another Explanation for the Unbanked

The high number of unbanked in the U.S. might not be primarily a result of perceived excessive fees, the inability to qualify for a checking account or distrust of the system. According to a 2011 FDIC survey, 8.2% or 1 in 12 households are unbanked.

Rather, those working underground are reluctant to become part of a financial entity in which funds are easily monitored by any number of government entities. Moreover, they might simultaneously be receiving entitlements such as welfare and food stamps. Funds in a checking account could attract the attention of those searching for cases of fraud.

Not Paying into Social Security, Exploited

Some might shrug off concerns that underground workers are not paying into Social Security and therefore will not be able to collect much or anything when they get older. After all, there is speculation that the system won’t hold up and “investing” in it is a fool’s dream.

However, society is already witnessing the plight of the aging who receive a low-amount Social Security check monthly. Interestingly some of them are being forced into the underground economy, especially as service workers walking dogs, care-taking the disabled and running errands.

In addition, because the underground economy is unregulated, workers can be exploited. They could receive low wages, no benefits and be exposed to environmental and safety threats.

A boom in job creation could suck the life out of it. Current workers would probably trade off paying taxes in exchange for benefits including Social Security and a healthy, safe workplace. There could be a crackdown by government. Stiff penalties, ranging from fines to prison for employers and employees, could drive both into conforming with the traditional economy.

With the shrinkage of the underground economy, statistics about everything from tax revenues to GDP could change significantly, while more cash can move through traditional banking and financial services.