The Great Recession has caused staggering amounts of unemployment in the United States. With the real jobless percentage in the low to mid-20s, many are desperate and turning to any employment opportunity, even if it’s in the underground economy. It seems the only boom that has occurred since the economic collapse is the shadow economy.
According to a new study by Edgar Feige, an economist at the University of Wisconsin-Madison, the underground economy is estimated to be worth approximately $2 trillion, double the amount in 2009. In total, the shadow economy accounts for roughly eight percent of gross domestic product.
Since jobless benefits are running out, the cost of living is increasing, a labor market being in a crisis and savings are being depleted, a household may have no other alternative but to enter the black economy in order to stay afloat and afford the basic necessities.
When we think of underground economies we think of the classic bootleggers with fedora hats and hot jazz music during the era of prohibition or drug dealers in back alleyways. However, the form of exchange has taken the shape of housekeepers, nannies, construction, web designers, technology specialists, assistants, landscaping, musicians, entertainers and other jobs that can be paid under the table.
Essentially, the black market can consist of any area: fuel, cigarettes, animals, transportation, media and even biological organs. Bloomberg News profiled a woman who walks children to the bus stop for $2 each kid.
“It’s typical that during recessions people work on the side while collecting unemployment,” Bernard Baumohl, an 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.”
There are many factors as to why people head underground to earn a living. Some of the reasons include immigration laws, the uncertainty in the overall economy, political instability, the effects of Obamacare and overall government regulations that prevent businesses from hiring workers – many companies are reducing their employees’ hours because of the president’s healthcare reform law.
Another piece of evidence to suggest that the underground economy is growing is the amount of U.S. dollars in circulation. According to the Washington Post, U.S. currency in circulation is at about $1.18 trillion: an indication of overseas demand of dollars and people getting paid in cash.
An op-ed piece published by Richard W. Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, on the Cato Institute website also blames government policies for the rise of the black economy.
“Many studies have shown that when people believe the taxes they are required to pay are reasonable and the political leaders tend to spend their tax dollars wisely, tax compliance rises, and vice versa,” wrote Rahn. “In the United States, there is increased evidence that many tax dollars are not being spent wisely and are often used to pay off political cronies.”
Financial experts argue that the increased prevalence of the underground economy should be a wakeup call for lawmakers and the private sector. As more people run out of patience in this tough economy, it could grow even more in the near-future.
Another terrifying prospect is the inevitability of the increase in taxes to make up for the lack of revenues. Since the $2 trillion of unreported income results in about $500 billion in unpaid taxes, legislators would need to find other ways to pay for social programs, entitlement benefits and foreign endeavors – especially since they don’t want to cut any spending at all.
On a global level, the underground economy provides an estimated 1.8 billion jobs.