Inside the Shadow Economy is a collaboration between Salon.com and New America Media.
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
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
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
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
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.
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.
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.
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?
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.
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
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.
informal economy is growing," says Joassart, "but in the last 20 years,
our economy has been deregulated and marginal taxation rates have gone
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."
that's while the labor force is growing," says Flock. "The labor force
grew by 52 percent but enforcement has declined by 31 percent."
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
A selection from the wage theft study makes the point in even stronger terms:
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
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.
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.
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.
Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21. More: Andrew Leonard
Post a Comment