The fastest growing sector isn't tech, it's the black economy...
The other day, I met an old friend I’d not seen for years. Decades in fact.
He’s a talented graphic designer. Naturally we talked about how his career had played out. It turned out that he’d drifted from job to job, but due to health problems had never managed to hold a job down for any great length of time.
To survive he’d taken any casual work he could find. Much of this work was paid for in cash; part of the booming black or ‘underground’ economy.
With so few jobs paying an adequate wage to meet the cost of living, millions of educated and skilled people now exist in an underground economy. In the US alone, this has ballooned to over $2 trillion annually.
Most people struggle to imagine a billion dollars, let alone a trillion. Two trillion dollars is $2,000,000,000,000. To put this in perspective, according to the IMF, the total GDP of the UK is ‘only’ $2.3 trillion…
That's maybe 10 million jobs in the US since the start of the recession
America's underground economy is not new, but since the Great Recession hit, analysts estimate it has more than doubled in size, driven by unemployed or underemployed people desperate to just survive. What other sectors can match that sort of growth?
Suddenly, the archetypal figures of the underground economy - the drug dealers and Mafia godfathers, now have a lot more company. Their new 'co-workers' are no longer just other criminals in the conventional sense of the word.
So most of these new participants in the underground economy today are ordinary citizens not evil greedy low-lives. They’re doing anything they can to survive and increasingly, this means taking jobs that pay "under the table" because they simply have no choice.
"It's typical that during recessions people work on the side while collecting unemployment benefits," Bernard Baumohl, chief global economist at the Economic Outlook Group, told The New Yorker.
I estimate this is equivalent to at least 5 million new jobs created in the US since 2008. This is fag packet maths I know, but let's say that of this estimated $1tr growth, each person earned on average $20,000 a year (this is probably much higher than the real figure, so I'm being cautious). That equates to 5 million jobs. If the actual average was $10,000, then we're talking about 10 million jobs...
As a benchmark, one of the fastest growing employment sectors, computer systems design, provides around 1.5m jobs in the US. The BLS forecasts this will be 2.1m jobs by 2020.
So the underground economy is huge. And it’s not just criminal businesses like drugs, cyber-crime or prostitution. Research shows that a great deal of the black economy exists in completely legal industries such as bars, clubs and restaurants. It’s simply non-criminal work that isn't declared to the government by the employer and/or the employee.
Just as many people have been hard hit by the recession, so too have many businesses. It’s a huge temptation for business owners who in better times would probably run their businesses completely legally. Faced with a stark choice between closing down or slipping into the underground economy, many businesses have chosen the latter. Ironically therefore, whilst a decision to operate in the black economy takes tax out of the treasury, it also saves governments money on welfare payments to people who at least maintain some earned income.
As a benchmark, one of the fastest growing employment sectors, computer systems design, provides around 1.5m jobs in the US. The BLS forecasts this will be 2.1m jobs by 2020.
So the underground economy is huge. And it’s not just criminal businesses like drugs, cyber-crime or prostitution. Research shows that a great deal of the black economy exists in completely legal industries such as bars, clubs and restaurants. It’s simply non-criminal work that isn't declared to the government by the employer and/or the employee.
Just as many people have been hard hit by the recession, so too have many businesses. It’s a huge temptation for business owners who in better times would probably run their businesses completely legally. Faced with a stark choice between closing down or slipping into the underground economy, many businesses have chosen the latter. Ironically therefore, whilst a decision to operate in the black economy takes tax out of the treasury, it also saves governments money on welfare payments to people who at least maintain some earned income.
Suddenly, the archetypal figures of the underground economy - the drug dealers and Mafia godfathers, now have a lot more company. Their new 'co-workers' are no longer just other criminals in the conventional sense of the word.
So most of these new participants in the underground economy today are ordinary citizens not evil greedy low-lives. They’re doing anything they can to survive and increasingly, this means taking jobs that pay "under the table" because they simply have no choice.
"It's typical that during recessions people work on the side while collecting unemployment benefits," Bernard Baumohl, chief global economist at the Economic Outlook Group, told The New Yorker.
He went on to say: "...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 works in the underground economy?
Some of the folks who've become trapped in the underground economy have been there for years, such as construction workers, illegal aliens and housekeepers. But it's a mistake to think these are all poorly educated immigrant workers.
The huge job losses caused by the recession have forced more people to switch from well-paid professional jobs to low paid service jobs.
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 gave them even more. The rules that demand that employers with 50 or more employees provide health insurance for full-time staff while allowing them to avoid offering plans to part-timers naturally encourages employers to offer more part-time work and less full time work.
"This type of regulation could put more people out of work and into an underground economy," Peter McHenry, an assistant professor of economics, told CNBC.
The underground economy hurts everyone
The rapidly growing amount of unreported wages in the U.S. is costing the nation billions in lost tax revenue. The Internal Revenue Service estimates that the losses from unreported wages have grown from about $385 billion in 2006 to about $500 billion currently.
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," said David Fiorenza, an economics professor at Villanova University. "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."
But even those getting paid under the table don't get an easy ride. They forfeit contributions to Social Security, which will reduce benefits in their retirement years. They also get no healthcare, paid vacation or other benefits.
And they certainly end up with lower pay than those in the rest of the workforce. Government regulations about minimum wages hold no sway at all in the black economy. Ironically this is the most free market sector of all…which means pay is constantly being forced lower.
What the growth of the black economy really means
Whilst very little hard data is available about the underground economy, I am convinced that the majority of people within it are there not because they want to be, but because they have no real alternative.
And its explosive growth means that if you want to work, more and more of the work that is available is within the black economy. It’s Hobson’s choice…no work or work that is officially illegal. It’s not a symptom of an increasingly dishonest population, it’s a symptom of economic policy failure.
Both the IRS in the US and the Inland Revenue in the UK have announced numerous new initiatives to clamp down on the black economy. More investigations; harsher punishments. And yet the non-payment of tax by businesses like Amazon and Google continue more or less unchallenged.
It’s unjust and it targets those who are least able to defend themselves.
Government presents these moves as being a drive for a more equitable society. For everyone to pay their fair share. This is disingenuous. If we had economic success, we’d still have tax evasion, but only by those who had the freedom of choice. Unlike global corporations, most citizens who avoid tax today have few choices left.
I don’t condone tax evasion by anyone. I just think that government needs to remember that it exists to serve its citizens not the other way round. Government is happy to punish people for not declaring income in just the same way as if they robbed a bank. And yet it is failed government economic management that has created the situation that forces most people into these desperate choices.
If forced to choose between your family having nothing to eat or paying your tax bill, what would you do?
Who works in the underground economy?
Some of the folks who've become trapped in the underground economy have been there for years, such as construction workers, illegal aliens and housekeepers. But it's a mistake to think these are all poorly educated immigrant workers.
The huge job losses caused by the recession have forced more people to switch from well-paid professional jobs to low paid service jobs.
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 gave them even more. The rules that demand that employers with 50 or more employees provide health insurance for full-time staff while allowing them to avoid offering plans to part-timers naturally encourages employers to offer more part-time work and less full time work.
"This type of regulation could put more people out of work and into an underground economy," Peter McHenry, an assistant professor of economics, told CNBC.
The underground economy hurts everyone
The rapidly growing amount of unreported wages in the U.S. is costing the nation billions in lost tax revenue. The Internal Revenue Service estimates that the losses from unreported wages have grown from about $385 billion in 2006 to about $500 billion currently.
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," said David Fiorenza, an economics professor at Villanova University. "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."
But even those getting paid under the table don't get an easy ride. They forfeit contributions to Social Security, which will reduce benefits in their retirement years. They also get no healthcare, paid vacation or other benefits.
And they certainly end up with lower pay than those in the rest of the workforce. Government regulations about minimum wages hold no sway at all in the black economy. Ironically this is the most free market sector of all…which means pay is constantly being forced lower.
What the growth of the black economy really means
Whilst very little hard data is available about the underground economy, I am convinced that the majority of people within it are there not because they want to be, but because they have no real alternative.
And its explosive growth means that if you want to work, more and more of the work that is available is within the black economy. It’s Hobson’s choice…no work or work that is officially illegal. It’s not a symptom of an increasingly dishonest population, it’s a symptom of economic policy failure.
Both the IRS in the US and the Inland Revenue in the UK have announced numerous new initiatives to clamp down on the black economy. More investigations; harsher punishments. And yet the non-payment of tax by businesses like Amazon and Google continue more or less unchallenged.
It’s unjust and it targets those who are least able to defend themselves.
Government presents these moves as being a drive for a more equitable society. For everyone to pay their fair share. This is disingenuous. If we had economic success, we’d still have tax evasion, but only by those who had the freedom of choice. Unlike global corporations, most citizens who avoid tax today have few choices left.
I don’t condone tax evasion by anyone. I just think that government needs to remember that it exists to serve its citizens not the other way round. Government is happy to punish people for not declaring income in just the same way as if they robbed a bank. And yet it is failed government economic management that has created the situation that forces most people into these desperate choices.
If forced to choose between your family having nothing to eat or paying your tax bill, what would you do?
