The Rise of the Underground Economy

Underground-EconomyThe Decline Of Unions Precipitated The Rise Of The Underground Economy

By Claire Goldstene 

In 2014, slightly over 11 percent of American workers were union members, as compared to 20 percent in 1983. Such a steady drop in union membership over the last 30 years, especially within the private sector, has weakened worker bargaining power and led to rollbacks on employer contributions to healthcare and pensions, as well as deteriorating working conditions, and falling real wages, for both union and non-union employees.

It also has resulted in the expansion of what is colloquially called the “underground economy,” an arena wherein not only exploitative, but illegal, labor practices abound. Though difficult to quantify, the underground economy more than doubled between 1970 and 2000, and spiked following the 2008 recession.

While often associated with criminal ventures like trafficking, prostitution, and piracy, a growing portion of the underground economy involves illegal practices within legal sectors such as construction, auto repair, food service, car washes, and nail salons. Practices include the violation of labor, tax, insurance, and licensing laws. These activities are detrimental not only to the workers in these industries, many of whom are immigrants, but also to the American public.

In California alone, which boasts the largest economy among the states and the eighth largest in the world, the Employment Development Department estimates that the underground economy employs 15-17 percent of the state’s labor force and generates $60 to $140 billion per year in economic productivity. This translates to an annual loss to the state of between $8.5 billion and $28 billion in corporate, personal, and sales and use taxes, money that could otherwise fund education, infrastructure maintenance and expansion, and a variety of social programs.

The underground economy also injures business owners who play by the rules who cannot compete against those who offer lower prices because they cheat, while exposing consumers to greater risks of substandard service with little recourse should something go wrong. Alongside a decline in union strength has come the loss of union apprenticeship programs that trained the next generation of workers and ensured a skilled workforce, an endeavor that undoubtedly benefited employers and consumers.

In short, the damage created by the underground economy extends to everyone. But, the exploitation of labor remains the most significant pillar on which it rests. This takes the form of lower wages, wage theft, which can include not paying wages at all, failure to pay unemployment insurance or to carry workers’ compensation, unsafe working conditions, and classifying workers as independent contractors rather than as employees to avoid various payroll taxes.

Those who toil in the underground economy generally perform un- or semi-skilled labor, often with little opportunity for advancement, at significantly lower wages than those formally employed. Moreover, they often rely on public assistance, in the form of food stamps and emergency room medical care, to subsidize this lesser pay. In many instances, workers receive wages for only a portion of the hours they worked in a given week, while others are paid on a piece rate basis—as low as $15 for a 10-hour workday hanging drywall.

The range of occupations in which underground economic activity thrives and the variety of violations involved suggests that a renewed and robust union movement would act as a countervailing power against the largely unimpeded power of organized capital to abuse vulnerable workers. The successful attack on unions over the past decades by industry leaders, advocacy organizations, lobbyists, and politicians at all levels of government is rooted in the idea that labor unions are concerned strictly with extending benefits to their members. A successful response necessitates a continued commitment by labor to its recent interest in advancing a broad social justice agenda as part of the effort to gain wider public support.

This requires embracing a vision of organizing that situates unions and their members within communities in ways that both move away from the past hostility to organizing immigrant workers and that highlights the shared social advantages of a strong and diverse labor movement—higher wages for union and non-union workers, a more highly trained workforce, safer working conditions, and an end to the use of public money to subsidize the exploitative practices at the heart of the underground economy.

Claire Goldstene has taught United States history at the University of Maryland, the University of North Florida, and American University. The author of The Struggle for America’s Promise: Equal Opportunity at the Dawn of Corporate Capital (2014), she can be reached at claire.goldstene@yahoo.com.

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Disclaimer: the views expressed by guest writers are strictly those of the author and may not reflect the views of the Vanguard, its editor, or its editorial board.

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7 Comments

  1. TrueBlueDevil

    The underground economy is not populated by “immigrants”, but illegal immigrants. This author ignores a massive issue which completely impacts her argument.

    The federal government estimates that there are 12 million illegal immigrants in America, but in 1986 their estimate was off by a factor of 3.5: the government estimate was 1 million, and 3.5 million signed up for Amnesty. Sober minds have estimated anywhere from 20 million (a consulting firm several years ago via an exhaustive, multi-pronged approach) to 40 million. California recently underestimated the number of illegal immigrants who would apply for drivers licenses by 100%.

    It is not the lack of unions that drove the underground economy, but the massive workforce willing to work for 50%, 60%, 70% less, and then use social services and / or other means to get by.

    Remittances of $23 Billion a year are sent from the United States to Mexico (UK Mail), and that’s only what we can track. That doesn’t include cash or goods driven back across the border or sent by other means.

    I do appreciate that she puts numbers ($8.5 – $28 Billion) in lost state revenue, but it’s hard to fathom someone hanging sheetrock for $1.50 an hour. I’d like to see some sources.

    If we didn’t have this massive illegal labor pool, wages and benefits would rise for America’s lower and middle classes, and we wouldn’t need to have endless conversations about minimum wage laws which will help few and drive more businesses out of the state.

    1. Barack Palin

      The underground economy is not populated by “immigrants”, but illegal immigrants. This author ignores a massive issue which completely impacts her argument.

      Thank you TBD, I was thinking the same thing.  How convenient to leave that out.

  2. PhilColeman

    Not disputing any of the content above. For me, my primary thought in today’s economy when thinking of “underground economy” is the rise in bartering for products and services. I repair your car and you landscape my yard. No public capture of the exchange and certainly no government controls or taxation in the picture.

    Phone apps are now used to enhance delivery of many types of services which, again, avoid the government’s involvement in any form. These services are paid by cash, but no taxes, local surcharges, FICA, et cetera. That would seem to be the more ominous emerging underground economy coming over the horizon.

    1. TrueBlueDevil

      Yep. I thought I read recently that tax revenues were down in Los Angeles, while it conversely has a large, dynamic, and growing economy. LA has a significant illegal population with different ethos and values. A lot of that is likely off the books.

      On occasion I watch the home remodel / flipper shows they have based in LA, and some of the prices they quote for specific or complete projects are unimaginably lowball. Even at $10 an hour these numbers are hard to compute. (Unless they’re just throwing out crazy numbers for TV.) You get the same crazy low numbers in Texas, but not in Seattle or Canada where they don’t have millions of people ready to work for peanuts.

  3. Barack Palin

    One could make the case that because of unions and the high cost of doing business with them that they had a hand in creating the underground economy because people and businesses had to find a way to go around the unions in order to cut costs.

  4. zaqzaq

    With the growth of the underground economy where individuals do not pay taxes just moves us closer to being like Greece where not paying taxes is an art form.

  5. Frankly

    I love the spin.  Non-union private-sector workers are “underground” and like organized crime.  They “steal” from all those deserving union members.  Oh wait, there are really not may private-sector non-union members… they mostly bailed from the unions as the companies they worked for, and the industries they tended to dominate, all went out of business, or had to cut so many of those higher-paying union jobs, that good ole’ union membership lost its shine.

    TBD covers 50% of the problem.  But it is a secondary problem. The primary problem is our domestic economic and social policy failing to respond adequately to globalism and automation.

    Immigration was something we all pretty much ignored before we lost our manufacturing and other service jobs to the global labor market and the rise of software and machines.  And we also ignored it while the predominant illegal immigrant job was farm laborer and the number of illegal immigrants was small enough to not be a material concern.

    But the numbers exploded.  And at the same time globalism and automation reduced blue-collar job opportunities for Americans, low-wage illegal immigrants worked their way into construction and other potential replacement careers for Americans displaced by the manufacturing jobs lost from globalism and automation.

    It wasn’t just greedy CEOs outsourcing jobs.  It was global competition demanding a constant reduction of the price of goods sold.  It was public sector pension funds sitting on the board of the private-sector public companies demanding high returns to keep paying those platinum union retirement benefits (mostly public sector unions).

    And instead of demanding policy to reduce taxes and regulatory costs to help these companies create more domestic jobs, the public sector unions and their political puppets doubled-down on more taxes and more regulations to punish these companies for not paying more.  And so even more jobs headed overseas and even more software and machines were purchased instead of new jobs being added.

    And instead of reforming the education system to help improve the value of the American worker to do more higher-skilled jobs, the teachers unions blocked reform that might mean fewer union members, or pay for performance changes.

    It is fascinating how in the face of all this obvious cause of the decline of the American worker, the response from the left is to just push for more of the same.

    The left has one fatal flaw in its strategy to keep punishing private business for not creating enough high paying jobs… the left cannot prevent private business from doing what it good for business.  The left cannot prevent business from investing in automation technology, and the left cannot prevent business from moving their operation overseas.  And this is exactly what the left has done… and now there are fewer good jobs, and illegal immigration becomes a much bigger problem because Americans need those jobs.

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