What America’s $2 Trillion Underground Economy Says About Jobs – Money Morning

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Doing what they can to survive in a dour job market, millions of Americans exist in an underground economy that has ballooned to $2 trillion annually.

By “underground economy,” we’re talking about all the business activity that is not reported to the government, which includes a growing number of people getting paid for their labor in cash.

That means the shadowy figures of the underground economy – the drug dealers and Mafia godfathers, for example – now have a lot more company.

But most of these new participants in the underground economy are ordinary hard-working Americans who are increasingly taking jobs that pay “under the table” either because nothing else is available or they need a second source of income to make ends meet.

America’s underground economy is nothing new, but since the Great Recession hit, experts estimate it has doubled in size, driven by unemployed or underemployed people desperate for income.

Paying workers off the books also has great appeal to employers, who then can avoid paying benefits and, starting next year, some of the costs imposed by the Obamacare law.

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“It’s typical that during recessions people work on the side while collecting unemployment,” Bernard Baumohl, chief global economist at the Economic Outlook Group, told The New Yorker. “But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer.”

Who Lives in America’s Underground Economy?

Some of the folks who’ve become trapped in the underground economy have been there for years, such as construction workers, childcare workers, illegal aliens and housekeepers.

People who do such service jobs often get paid partly or entirely under the table. The huge job losses caused by the Great Recession forced more people to switch to service jobs.

Many long-term unemployed people have struggled to survive by taking odd jobs, for which they almost invariably get paid in cash.

But the biggest contributor to the underground economy in the past few years has been employers increasing their use of freelancers or “independent contractors” – even many who actually work full-time.

The weak U.S. economy has already given businesses plenty of incentives to cut costs by paying workers under the table. But the arrival of Obamacare Jan. 1 – particularly rules that requireemployers with 50 employees or more to offer health insurance while allowing them to avoid offering plans to part-timers — will give them even more.

“This type of regulation could put more people out of work and into an underground economy,” Peter McHenry, an assistant professor of economics at the College of William & Mary, told CNBC.

It’s a sea change in how businesses traditionally have hired, and if it sticks through a recovery of the U.S. economy, it will have grim implications for American workers.

“Businesses are not angels, and they exist to make a profit,” Alexandre Padilla, associate professor of economics at Metropolitan State University of Denver, told CNBC. “They are going to do everything they can to keep costs down, and if that means paying people off the books, they will do it. The government doesn’t really have the resources to track down every business that does this.”

What the Underground Economy Costs

The rapidly growing amount of unreported wages in the U.S. is costing the nation billions in lost tax revenue.

The Internal Revenue Service estimated that the losses from unreported wages have grown from about $385 billion in 2006 to about $500 billion last year.

State governments lose another $50 billion to the overall underground economy.

That means the people who play by the rules are getting a raw deal.

“Those working and not paying the taxes put the burden on those who pay the tax,” David Fiorenza, an economy professor at Villanova University, told CNBC. “Taxes could be lower if the government were able to capture the underground economy instead of raising taxes on those currently paying the various income and payroll taxes.”

Even the workers getting paid under the table don’t get off scot-free. They forfeit contributions to Social Security, which will greatly reduce benefits in their retirement years, and get no healthcare, paid vacation or other benefits.

And they may end up with lower average pay to boot.

“People who do these types of jobs run the risk of getting exploited with lower pay or not being paid at all,” Laura Gonzalez, professor of personal finance at Fordham University, told CNBC. “There could be more exploitation if more people are forced into this type of economy.”

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