Inside the Shadow Economy -- A Growing Underworld Bazaar

Inside the Shadow Economy -- A Growing Underworld Bazaar

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Inside the Shadow Economy is a collaboration between Salon.com and New America Media. 

A day laborer waiting on a street corner for a morning's worth of work hacking brush. A sweatshop employer paying less than minimum wage and skimping on overtime. A woman running a day care center out of her apartment. Drug dealers, sex workers, unlicensed street food vendors. A plumber who deals only in cash or a farmer who trades food for help with the harvest.

What do they all have in common? They're part of the "shadow economy." Also known as: the underground economy. Pick an adjective, any adjective: informal, gray, black market, under-the-table, hidden, unobserved. There are many different names for the realm where taxes aren't paid, labor laws are ignored, and cash is king. But on at least one point most observers agree: the shadow economy -- in the U.S. and abroad -- is growing. And that's not healthy. In a shadow economy, workers are often unsafe and ruthlessly exploited, while governments are deprived of crucial revenue -- yet still forced to foot the bill for essential services.

In an era of seemingly permanent high unemployment -- what some call the "new normal" -- the shadow economy is where people end up after having been downsized or forced out of their homes or displaced by globalization. And while the shadow economy does offer opportunities for survival -- and even a modicum of upward mobility -- for desperate people in desperate times, it's also proof that capitalism as we know it just isn't working. Once upon a time, underground economies were seen as a problem for developing nations that hadn't figured out either democracy or how to manage an economy. But now, increasingly, the shadow economy is a developed world problem -- contributing to a growing disenchantment with the political process, and a growing sense that workers are on their own, scrambling for ever smaller pieces of pie at the bottom while those on the top consolidate their gains.

Both the shadow economy's size and speed of growth, however, are uncertain. When a sector of the economy's essential attribute is that it doesn't show up in the numbers collected by government or reported by employers, we're dealing, right off the bat, with an entity that is fundamentally hard to quantify. We don't even know, for sure, what the impact of the Great Recession has been on the shadow economy in the U.S. High unemployment has clearly forced workers to do whatever they can to get by, but it has also resulted in a stark decline in illegal immigration -- which, in the past, has been considered one of the biggest contributing factors to the growth of the shadow economy.

But most of all, we don't know exactly why the shadow economy is growing. On the one hand, conservatives and libertarians see the rise of underground economies as a necessary (and justified) response to high taxes and excessive regulation. The bigger the heavy hand of government, the harder people -- both workers and employers -- will try to escape. The "coercive power of the state," as Friedrich Hayek liked to say, is the enemy of true liberty.

Progressives and labor organizers have a diametrically opposed view: Globalization and deregulation have smashed the traditional employer-employee relationship, they say. In the dog-eat-dog world of global competition, the rules on the books are no longer being enforced and workers everywhere are getting squeezed. That construction worker willing to cut you a discount if you pay cash for your new porch is in part responding to pressures exerted by China and the global triumph of capital over labor. That shantytown bike mechanic hasn't been liberated from the state; he's been cut off from true participation in an economy that will allow him to prosper.

As Peru's Hernando de Soto, one of the first economists to truly appreciate the importance of the shadow economy, has emphasized repeatedly, the real challenge isn't necessarily to remove regulations, but to find ways to legitimize what's already happening, to make it easier for the dispossessed to move out of the shadows.

Watching Washington politicians demagogue about deficits and job creation while they drown the nation in endless partisan squabbling isn't getting us any closer to understanding what's really pushing the growth of the underground economy -- or pointing us towards a possible solution. Horse-race coverage of the latest government shutdown idiocy seems less and less connected to the everyday challenges of everyday lives. "We have to wake up to the world that we live in," says Martha Chen, a lecturer in public policy at Harvard's Kennedy School of Government who has studied the informal economy.

And that means paying attention to the street. So today, Salon, in partnership with New America Media, is launching a new series, "Inside the Shadow Economy." The first goal is to get a closer look at the people who make up the shadow economy. Their stories, their lives, will help illustrate some of the larger questions -- why and how this is all happening.

Beyond that, the greater challenge is to figure out what we can do about it. Resurrecting the power of labor in a globalized world is a monumental task -- it is decidedly unclear whether any single nation can do it on its own. But organizing a global worker's movement seems an equally quixotic enterprise. Refocusing government on the dire situation on the ground will require grass roots pressure and the smashing of outdated partisan paradigms. Finding ways to legitimatize the shadow economy while protecting workers from abuses may even demand that the developed world take some lessons from the experience of emerging nations. With economic growth sagging everywhere, it's going to be an uphill battle. But that doesn't mean we should stop looking for solutions, and we'll be exploring potential paths forward in this series.

Because if there's one thing that the stories of the shadow economy do tell us, it's that no matter how dire the situation, people will find a way to make it through the day. Change does happen. It might come from the street, instead of Washington, and it may need encouragement, instead of scorn. But disenfranchised will, eventually, find their voice. The sooner we hear it, and act, the better off we'll all be.

What is the shadow economy?

The standard estimate of the current size of the shadow economy in the United States ranges from around 8-10 percent of total GDP -- in 2010, an amount equal to around $1.4 trillion. In California alone, lawmakers are quick to cite numbers that place the underground economy at anywhere between $60 billion and $150 billion. But the critical issue isn't the overall size, but instead the rate of growth. One influential measurer of the underground economy, Austrian researcher Friedrich Schneider, pegged the U.S. shadow economy at 4 percent of GDP in 1970 and 9 percent in 2000. Others have concluded that the informal economy has been growing at a rate of 5 to 6 percent a year since the early 1990s -- faster than the "regular" economy.

Schneider is one of the more vocal advocates of the view that the size of the shadow economy is correlated with levels of taxation and regulation: "Countries with relatively low tax rates," he writes, "fewer laws and regulations, and a well-established rule of law tend to have smaller shadow economies."

But that doesn't quite jibe with historical trends in the U.S. over the past few decades, observes Pascale Joassart, a professor of geography at the University of California at San Diego and the co-author of a groundbreaking study of the growth of the "informal economy" in Los Angeles.

"The informal economy is growing," says Joassart, "but in the last 20 years, our economy has been deregulated and marginal taxation rates have gone down."

What's really going on, says Joassart, is that there has been "a restructuring of the economy which, in order to promote flexibility and global competitiveness, has led to greater reliance on part-time and contingent labor."

"This includes a large informal sector made up primarily of lower-skilled workers who are required to work (such as former welfare recipients) and immigrants who have limited protections," he says. "I would argue that it is a deregulation of the economy, including a decline in welfare programs and an increase in free trade and global competition, that has led to an increase in informal work in industrialized nations."

That deregulation, says Sara Flock, policy director at the California Federation of Labor, goes hand in hand with a failure to enforce the labor laws currently on the books. Flock acknowledges that one driving force in the growth of the shadow economy has been the desire of employers to avoid profit-cramping requirements like worker's comp, payroll taxes, minimum wages and overtime. But the difference now is that employers can easily get away with doing so, because no one is minding the store.

A study conducted by UCLA researchers in 2010, "Wage Theft and Workplace Violations in Los Angeles," reported that between "1980 and 2007, the number of minimum wage and overtime inspectors declined by 31 percent."

"And that's while the labor force is growing," says Flock. "The labor force grew by 52 percent but enforcement has declined by 31 percent."

"The underground economy has always existed," adds Flock, "and has always preyed on the most vulnerable workers -- immigrants, women, young people, and now increasingly seniors. But what's different now is that there has been a real erosion of the traditional employer-employee relationship. Employers are much more mobile and are using many different tools to make sure that they don't actually directly employ workers."

A selection from the wage theft study makes the point in even stronger terms:

Today, at the start of the twenty-first century, the nation is facing a workplace enforcement crisis, with widespread violations of many long established legal standards. The crisis involves laws dating back to the New Deal era that require employers to pay most workers at least the minimum wage and time-and-a-half for overtime hours and that guarantee employees' right to organize and bring complaints about working conditions. Also violated frequently are more recently established laws that were designed to protect workers' health and safety, laws that require employers to carry workers' compensation insurance in case of on-the-job injury, and laws that prohibit discrimination on the basis of age, race, religion, national origin, gender, sexual orientation, or disability.

High unemployment, unsurprisingly, has also been correlated with a larger informal economy. But what's interesting, says Joassart, is that in the past, the informal economy rose and fell in a cyclical pattern. In a recession, the informal economy would grow, but when the economy returned to health, it would decline. That pattern is no longer visible. Since 1990, the shadow economy keeps growing, irrespective of what's happening in the business cycle.

Welcome to the 21st century! The bottom line: Globalization has substantially shifted the relative power of labor and capital.

"What you have had is a huge labor injection of labor from China and India and all of that," says Martha Chen, "and you haven't had a commensurate injection of capital. So the labor-to-capital ratio is at a point where capital is really in the driver seat."

That's the ideological mathematics that explains both "the new normal" and the shadow economy.

When capital is in the driver's seat, government is no longer enforcing labor laws, and unemployment is high, workers have no leverage. Opportunities for jobs with benefits and good pay decrease, and everyone is forced to scramble for whatever is available. Increasingly, that means work that is completely outside the regulated sector. Work that is found in the shadow economy.

ALSO READ Inside the Shadow Economy -- Touch Me for Money, Life as a Male Escort

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21. More: Andrew Leonard
 

Comments

 
Anonymous

Posted Sep 29 2011

Yes, but the cost of 'protecting' these 'exploited' workers is huge. Why can't the nanny state just let people look out for their own interests. The cost in savings that people can then spend on things that they really want rather than protection money would be huge.

Anonymous

Posted Sep 29 2011

Nice

Anonymous

Posted Sep 29 2011

A shadow economy is an excellent example of capitism at work. Induviduals bartering for goods and services without government getting a in the way.

A strong shadow economy shows that socialist governments, like ours here in the US, doesn't work.

This article sounds like Marx wrote it.

Anonymous

Posted Sep 29 2011

Who's being deregulated?!? Try starting an organic farm and see how "deregulated" our country is. The black market is the only free market left. It's a natural, predictable reponse to too much government interference. The people have spoken, get out of our personal business! Nice propaganda piece, your handlers will be proud.

Anonymous

Posted Sep 29 2011

Nice piece, but clearly written with an agenda behind it. Your bias shows through.

Also, I reject this assertion entirely:
"The informal economy is growing," says Joassart, "but in the last 20 years, our economy has been deregulated and marginal taxation rates have gone down."

Oh really? Put this to a test then and really map it out.

Go look back to 1960, to any city like say Pittsburgh, PA, and see what it would take for you to start a business of 50 employees from scratch. What applications were needed with the city/state/county/fed/IRS/ etc. compared to today?
What labor requirements were mandated then versus today? What about health care, retirements, and other benefits? What was the complexity of the payroll systems needed back then versus today to navigate through all the payroll tax, SSI, Disability, Medicare, etc calculations and witholding mandated today? What about the sources of financing, such as bank loans, SBA, etc. and what regulations and requirements and other hoops you have to jump through.
Then let's look at liabilities recognized back in 1960 versus today. The things businesses were not sued for back then but are today.
It is such a fallacy to say that our economy is more deregulated today than before. It is simply not true, and an unbiased analysis would prove that easily.

Anonymous

Posted Sep 29 2011

I don't have any problem with this, except for the fact that lot of people in this shadow economy are on government dole like food stamps, medicaid, welfare programs that sometimes includes cash benefits, extended unemployment benefits etc. As an end result government loses taxes and cost of all these welfare programs keep going up, resulting in huge government deficits. And whoever is honest and working is carrying a larger and larger burden of this bloated and unsustainable system.

Anonymous

Posted Sep 29 2011

What you call "the shadow economy" is what keeps people from starving in places like Cuba and North Korea. Sadly, now the U.S., having enacted a plethora of additional regulations to discourage hiring, has become a sister to these totalitarian governments. The black market is a direct result of the incredibly high cost of employing someone per all the government edicts.

Anonymous

Posted Sep 29 2011

"it's also proof that capitalism as we know it just isn't working."
Nonsense.
The root causes are:
- overpopulation
- declining skills of the average person
- the inability of the planet to support sustainably more than 4B people

Anonymous

Posted Sep 29 2011

I've bartered my electrical skills more than a few times.

Anonymous

Posted Sep 29 2011

Although the article is focused on the "shadow, off the books" labor trade part of the economy, the real SHADOW ECONOMY is the FINANCIAL INDUSTRY composed of FINANCE, INSURANCE AND REAL ESTATE (FIRE) SECTOR. The extent to which capital is highjacked and sucked out of the real economy based on labor, and used to leverage deals is in the TRILLIONS of dollars. The new casino economy has destroyed the real main street and regular community based economies all over the planet. Until the financial industry is curtailed/regulated by real, substantial and viable laws enforced by ethical courts and legislation, there will be no GD recovery!

To all of the posters here who want to champion capitalism and defend deregulation, wake up!!!! You are merely shills is a rich man's game. As for the "nanny state" as it was referred to by someone else, when you have found yourself homeless, sick, hungry and in need of some assistance, I hope you realize how heartless you were to deny anyone else the benefit of the government's safety net.

Anonymous

Posted Sep 29 2011

Wonder how things would shift if we stopped letting our companies outsource & severly cutback imports. I realize it would be a huge shift, but one that should be slowly done with a timed, phased approach.
If the chinese didn't have the manufacturing demand they have today........

Anonymous

Posted Sep 29 2011

What is not being said clearly here is that the population that makes up a very large percentage of these day laobores are illegal aliens. However, the author does make a weak attempt to identify that these day workers have a huge impact on our system by not paying taxes, through receiving assistance for food, housing and medical treatment.

The articles focus was moving them out of the shadows so they are not exploited, but does not address the root cause and that the fact that they are taking advantage of every citizen and our resources by not paying taxes, taking away potential job employment and funds that would be given to citizens for their personal wellbeing.

Anonymous

Posted Sep 29 2011

Thank you GOP and Americans everywhere that wanted something 'for cheap'...:(

Anonymous

Posted Sep 29 2011

The person writing this is on the wrong side of history

Anonymous

Posted Sep 29 2011

I am small business owner and the shadow economy is a way to survive. Don't except a lifetime with with corporation because they will get rid of you when ever they want no matter how much you have contributed. It's a dog -eat-dog world out there. Take a look at Darwin's theory survival of the fittest. Well that's the reality in this tough economic world. Who ever makes the most money by any means will more likely to survive.

Anonymous

Posted Sep 29 2011

Many of these people are opting-out of what they see as a corrupt and over-regulated main-stream economy. I agree with them. People want to be left-alone by the so-called public servants.

Anonymous

Posted Sep 29 2011

Supporting those in need is fine.
The way we do it not.
Those needing (government) support outbreed beyond their fair share.
Do this for a century and what was a 10-15% minority in 1900 is a
70-80% majority now.

Blaming capitalism is a 19th century game.
Get lost ...

Anonymous

Posted Sep 29 2011

This is what happens when republicans get their way.they are for de-regulating bussinesses and
breaking the backs of uniuns and their members.they are rich and do not want a middle class to exist.they want only rich and poor,so our efforts,keep them in luxury.The rich only loan the poor money for essentials,so the interest pays for their decadent life styles.Next time you see your favorite
cantidate,find out who stands with them,it may open your eyes.

Anonymous

Posted Sep 29 2011

I just love to watch these pinheaded, government-paid, so called "economists", twist economics into PRETZELS. All in order to sell their political propaganda and anti-capitalist agendas.
FOOLS, the "shadow economy" IS capitalism at work! It represents the industry of desperate people, ESCAPING the heavy hand of oppressive government regulations and business taxes that have destroyed jobs and America's economy in general. These are the same kind of overgrown, government practices, that have wrecked the economies of other countries around the world!
Can liberals EVER learn?

Anonymous

Posted Sep 29 2011

Dear NAM -- Someone needs to take on the job of editing Comments. Several entries here appear up to five times. It's also nearly impossible to register, which accounts for the fact that every comment is anonymous. This tendency, widespread on the Internet, only encourages mindless vitriol at the expense of genuine debate.

On a more substantive level, two observations:

The developed world's largest underground economy by far is in Italy, a G-7 nation, where up to a third of GDP is generated by clandestine exchange. Yet very few of the generalizations in this article apply to the Italian "mercato nero" dynamic, which has prevailed since the nation's unification 150 years ago. Clearly, there are other unaddressed forces and social customs at work. Many of the play roles in other Mediterranean/Latin cultures -- both indigenous to Europe and exported to the Americas and parts of Asia and Africa -- that share Italy's propensity for "informal" economic transactions on a grand scale. Argentina and Venezuela come to mind, as do the North African countries and Greece.

Secondly, and more troubling, is the fact that such a lengthy examination on America's underground economy includes not a single quote or vignette featuring its actual participants. It's an intelligently argued and articulate piece, but presented exclusively through the lens of academia and bureaucracy. Even if follow-up articles prove more reality-based, the opener -- the most crucial component of a series -- ought not to be so coldly abstract.

F. Viviano
Lucca, Italy

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