What America's $2 Trillion Underground Economy Says About Jobs

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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.

"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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Join the conversation. Click here to jump to comments…

  1. Walter Baltzley | April 30, 2013

    This is what people do when forced to compete with the likes of China, whose workers get paid pennies while receiving subsidized food and housing. Americans are not allowed to live in prison work camps, use substandard equipment, or work in unsafe conditions. Americans are not allowed to work 18 hour shifts without overtime pay. Americans are also forbidden to sell their products for less than it costs to manufacture them…

    When you outsource the majority of your manufacturing jobs, and you have nearly 20%+ of able-bodied, working-age people unable to find legitimate work…SOMETHING has to give. Americans are intelligent, industrious, and creative. They will find a way to provide for themselves…legal or not!

  2. JT | April 30, 2013

    Example – wife cleans two homes a day and husband moves four lawns a day = $100,000 a year in cash – no taxes. Additional benefits: food stamps, housing assistance, free school lunches. Weekends on fleat market for additional cash. Driving Escalates. What a country!

  3. Paul Livingston | April 30, 2013

    Do you want to tax the underground economy? Then pass the FairTax bill HR25 / S 122.

    Along the way this bill will eliminate some $431 billion we spend each year to comply with our present tax code. Disposable income goes up with the elimination of income and FICA tax withholding. Cheating and tax compliance goes down with the one progressive tax collected by 30 million licensed retail businesses instead of 154 million tax filings. Learn more at http://www.fairtax.org

  4. tim | April 30, 2013

    It may or may not be true that the US underground economy is now worth 2 trillion dollars a year.
    It is almost certainly untrue that "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."These unreported jobs are offered and accepted because employers cannot afford to pay wages at a level which would permit these taxes to be collected. Should the IRS be successful in taxing all this unregistered work it would simply disappear.

  5. Jim | April 30, 2013

    Why not bring EVERYBODY into the tax base (think prostitutes, drug dealers, mafia hoodlums, etc.) by eliminating the IRS completely and funding the federal government with the national retail sales tax? Jobs would come flooding back into this country with no income tax…..The legislation has been researched and has been introduced in the House and in the Senate…it is called the Fair Tax!

  6. Denise | April 30, 2013

    Paul and Jim both spoke about the Fair Tax being the solution. The problem I see is that Obamacare collection is tied to the IRS. How I wish they would eliminate the IRS! It sounds great though, I'll check it out.

  7. RT | April 30, 2013

    What? Not exploited? I work in a company, pay tax, ss, etc. and the health insurance is milking my income from my biweekly salary, $150/paycheck, but the benefit is not worth it. Copay $45, and I pay the medicine with just a little discount. I am pretty sure, they do this to many companies.
    What a big legalized scandal!

  8. James | May 1, 2013

    The "underground economy" is nothing but the "economy." It is market based prices and wages. "Regular economy" wages are set by regulations such as minimum wage, etc. When you see it this way then it doesn't seem like some evil attempt by businesses to cut costs. It's a logical attempt by business to conduct business. And by this "underground economy" sector not paying taxes this doesn't burden tax payers at all. Because they do pay taxes every time they buy gas, every time they eat, every time they turn on the lights. And the money they don't pay in taxes isn't evaporating from the economy, it is flowing to where it is more valued, back into the business that hired them which means that the company will be paying higher taxes on the increased revenues. These "shadow workers" are making a living how you do in America, by working hard. An IRS expansion to "capture" this sector would just result in less wealth for lower income individuals or a 'shadow-shadow economy.' Let the shadow economy live on and let it expand, because it is pretty much the only sector of the economy that has seen considerable growth, and the only part of America that is providing for hard working, low-income individuals.

  9. Nick | May 5, 2013

    I think that illegal aliens are the biggest contributors to the shadow economy, including money that earn here that is spent in the mexican, central and south American economies. Politicians tell you illegal immigrants pay in to social security but that is not the standard, most employers know exactly who they're hiring and what they trying to get away with!

    And why is there all this hullabaloo about going after people with expired student Visas who "shouldn't be allowed entry to the U.S." when there are MILLIONS of people who just WALKED over with NO registration at ALL!!

    I agree that if the shadow economy were retroactively taxed and taxed moving forward then the people who have been paying something year after year will get less pressure.

  10. Nick | May 5, 2013

    Then again, while I see logic in my perspective, I also view it through the lens of someone who was partially disabled by an illegal immigrant…which I am. I may get better but I don't know for sure. So, as a natural born citizen, I am unable to do so many lines of work because of someone who is here illegally, for two and a half years and counting. As someone who was born a poor kid from Wisconsin working paycheck to paycheck when that happened with the grace of God and no medical help from Worker's Compensation (because it was an illegal immigrant who hurt me) I have improved but I am not sure if I'll ever fully heal. I did receive food stamps though, which saved my life, (though I should have gotten the full support of the mechanism of the state in legal, medical and financial care), but I did leave about a $60 dollar unspent balance when I started earning at a job off my feet by the grace of God and a friend met years before who knew of my situation.

  11. Gary | July 8, 2013

    "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."
    Nice progressive argument but not true. Taxes would not go down, spending would go up. The government cannot resist spending, it doesn't earn the money and has no inherent motivation to stop spending it.

  12. Sue | November 16, 2013

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

    What rule was laid off/long-term unemployed people breaking?

    Raw deal? Take someone with 20+years excellent work experience who's been out of work for 3 years out to lunch someday. Better yet, take them out for a couple of cocktails. Liquor to loosen up those lips. You'll hear first hand what a "raw deal" is.

    Anyone who's been chronically unemployed and has found a way to survive in an underground economy, GOOD FOR THEM. I'd like to see this blossom. Survivors.

    Long term unemployment ain't for the faint-hearted or weak. Try to imagine the survival resources required to maintain just your sanity when the world is calling you unmotivated, outdated and "lazy' because your former employer couldn't afford to keep paying you for your services. Takes courage and tenacity to find your own solutions in this climate.

    Think of it this way. "you" are FREE. You don't 'report' to ANYONE. See where I'm going with that perspective…….?

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