For the most part, cash transactions or illegal enterprises such as drug trafficking,
prostitution, and gambling constitute the lion's share of an underground
economy; it is not, however, limited to such activities. Legal transactions may
also take place under the table to dodge payment of taxes.
Whereas, a shadow economy can exist in any country, it is not as
widespread in developed countries as it is in less developed economies because
of their lack of effective fraud detection mechanisms, widespread corruption, inadequate
law enforcement systems, or simply pervasive poverty.
A major study for OECD (Organization
for Economic Co-operation and Development) countries shows that the size of the
UE, as measured by the percentage of GDP (Gross Domestic Product), is highest
in Italy and Greece and lowest in Scandinavian countries, suggesting that a
combination of high taxes and inefficient government institutions can trigger an
In modern time, by u tilizing cyberspace resources, savvy crooks have been able to buy and
sell stolen merchandize and illegally obtain vital personal information through
the black market online thus adding a more elaborate dimension to this
phenomenon. The majority of transactions in this market are related to credit
cards and bank accounts, 51% and growing swiftly. This was up 38% between 2007
and 2009, according to a report by CNNMoney.com which claimed that "If every
stolen credit card and bank account had been wiped clean last year  that
would have netted cybercriminals some $8 billion."
of the actual size of the UE is next to impossible for the obvious reasons that
its activities are concealed and its inhabitants remain anonymous. As such, government
is not able to deal effectively with its detrimental consequences.
Even though there is no reliable data on the scope of the UE in the United States,
the emerging evidence shows that it has been expanding briskly in recent
decades. According to a report in Washington
Times on 12/09/09, the UE accounts for as much 13% of the GDP of the U.S.
economy, a sum of about $1.8 trillion annually. While these numbers might be a
bit overestimated, the findings of one credible study show in 2006 the size of
the UE was about 6% of the U.S. economy, up from 3.4% in 1973 and it is still
Understandably, one can argue that the post-2007
recession surge of the UE is triggered by a high jobless rate and the decline
in the level of middle-class income level and is evidenced by the growing
popularity of cash transactions, despite the fact that other more convenient
means of payment are readily available. Not only has the total demand for cash
increased, but real per capita currency has also increased, "Real per capita
currency has been exploding from $160 in 1959 to $2,489 in 2006", it is about $3000
People demand currency for a variety of reasons, including paying for
daily transactions and unexpected expenses as well as taking advantage of
market opportunities through speculation. Logically, demand for money induced
by these motives should have been declining in light of recent financial
innovations and improvements in payment system and with the availability of
modern payment instruments that are cheaper and more convenient, but it has
Additionally, the popularity of the Euro should have led to the weakening
of international demand for the U. S. dollar. The upward trend in worldwide desirability
of US dollar must be attributed, therefore, to the expansion of the underground
economy. Cash is still the most frequently used medium of payment, particularly
for hidden transactions.
Besides, the lingering insecurity created by the
off-putting effects of economic downturn has led to panic and an overall sense
of frustration for the job-seeking populace. Foremost, high unemployment has
made decent-paying jobs in an open economy hard to find for laid-off workers,
forcing many of them to accept lower wage rate jobs in the underground sector.
The taxes they don't pay while working underground recompense them not only for
the loss of accepting lower wages, but also enables them to save more money for
emergency expenses since cash-paying jobs do not include the benefits and safeguards
that come with ordinary jobs.
Reiterating, all transactions in an UE are not connected
to illegal activities; everyday legitimate activities or jobs can also go
underground for various reasons, most notably the avoidance of having to pay taxes
or receiving government handouts while working at a paid job. The desire to go underground
may intensify when people think that they are being unfairly treated by the tax
system or do not benefit deservingly from the outcome of economic prosperity.
In particular, people get upset when they learn from the news that corporations
do not pay their fair share of taxes because of countless numbers of loopholes they
can take advantage of or learn about their symbiotic relationships with
politicians. The tax-paying consumers feel betrayed when news media report about
pay raises for already well-paid CEOs or they hear the phrase "tax cuts for the
wealthy." They too try to escape paying taxes by defecting to the underground
sector or resorting to cash business.
Furthermore, the current harsh and long
economic slump has created financial hardship for millions of households as
well as for business firms, forcing them to craft creative ways to deal with burdensome
expenses. Consequently, the UE has become a frugal choice for many individuals as
well as business people who have watched their real income, their purchasing
power, dwindle down because of escalating costs, a rigged economic system, and an
unlevel economic playing field.
Excessive regulatory constraints such as price
controls and stringent working environment requirements can also inflict undue
costs and thus erode the profits of business firms, forcing them to do business
under the table.
A number of experts blame illegal immigrants for
the growth of the UE. The correlation between the number of illegal immigrants
and the UE is based on the common sense proposition that illegal immigrants
have to accept menial cash-paying jobs because they do not have work permits.
While this is true, there are conflicting, and thus inaccurate, accounts of the
number of illegal workers in the U.S. According to a
report by the WSJ, April 2005 ,
" The government puts this population at 8.5 million,
but that may represent a serious undercount." PEW Hispanic center
estimates the number of unauthorized immigrants in the U.S. about 11.2 million
for the years 2009 and 2010, nearly 3.7 % of the U.S. population. A slight
decline in 2007, after many years of persistent growth, occurred because the
U.S. economy fell into a deep recession, and it continued to descend
thereafter. Out of the 11.2 million unauthorized immigrants, nearly 8 million
of them were participating in the unofficial labor force in 2010 according to
An important lesson learned from the stability of this statistic is that
illegal immigrants come to the U.S. basically in search of jobs, especially
during good economic times. While the employment rate dropped drastically in
the aboveground economy in recent years, it seemed as though it remained stable
in the underground economy simply because jobs in this sector are mostly in
labor intensive industries providing essential goods and services whose demand
deemed to be impervious to business fluctuations.
Livesafely.org provides a
list of 67 industries that rely heavily on unskilled laborers. They pay their
workers in cash under the table and are growing, especially in such areas as
in-home repair services, tutoring, snow removal, construction, babysitting,
farming, food processing, janitorial, and garment manufacturing. According to
the Policy Institute of California, Arizona has the highest percentage of
illegal immigrants than any other state: "The institute estimates that in 2006,
8.3 percent of Arizona's population consisted of illegal migrants, followed by
California with 7.8 percent; Texas, 7.1 percent; and Florida, 5.5 percent."
A recent report by the WSJ, February 17, 2011, suggests that not
only the increasing numbers of illegal immigrants but also industry
proprietors are contributing to the intensification of the UE.
for small businesses to go underground is evidently strong since their
operation is usually labor-intensive, and they can augment their profit by
hiring undocumented workers at lower wages and without job benefits. They can
also operate on a cash basis, thus evading paying taxes. The U.S. Census Bureau
reports more than 10 million Americans are self-employed, up from about 8
million in 1980. Even more suspicious, is the number of "nonemployer firms,"
business firms with no payroll. The number of such entities is estimated to be
around 20 million, up by 33% since the late 1990s.
The possibility of earning good wages by working
underground is the main attraction for illegal immigrants.
By working in the UE
in their adopted countries, they have been able to earn good money and send part
of their income back to their home countries, as much as $276 billion according
to an estimate by World Bank in 2007. This number has grown by more than 100%
since the year 2000. World Bank economist, Dilip Ratha, believes "the United
States lost $41.1 billion in 2005" and this amount was transferred to other
countries, first and foremost to India, by illegal immigrants. It is like a
revolving door analogy; low income, heavily populated poor countries keep sending
workers to developed countries and cash is returned home on a revolving basis. Consequently,
host countries suffer a double whammy by losing tax revenue as well as cash
that could potentially create demand for domestic products.
One can argue that fraudulent activities are driven
either by greed and the desire to earn money by any means including illegal
undertakings, or are in response to unfavorable economic condition, high
unemployment, inability to attain a decent level of living, and the high cost
of doing business stemming from hefty regulation. Examining the evidence deemed relevant, the
correlation between effectiveness of government institutions, its regulatory
constraints, and its tax system was palpable. The distortionary effects created
by the UE are damaging not only to the official economy but also to government
policy makers because these distortions impede their ability to make
appropriate macroeconomic decisions based on accurate assumptions about important
economic indicators such as unemployment rate, the poverty rate, , and the pace
of aggregate income and spending.
For instance, one the one hand, the increasing global
demand for US dollars cash hinders the ability of the Fed to keep track of
monetary aggregates; on the other hand, the increasing frequency of clandestine
transactions, hinders the ability of IRS to collect all the taxes owed,
creating a costly tax gap, currently between
$350 to $00 billion. Such a short fall
of revenue not only exacerbates the already ballooning national debt and
deficit, but also jeopardizes the viability of social programs that are
financed by taxes. Adding to costs, state governments must devote a great deal
of money and manpower to tackle the costly consequences of the UE. In addition,
businesses in the UE put law-abiding competitors in the open economy at a
disadvantage; full-tax-paying companies can no longer compete with them and
hence lose revenue.
Based on the foregoing analyses, one can argue that
fairer income distribution and closer attention to the issues related to
equality will certainly help to mitigate the pent up frustration that inspires
some people to defect to the UE. Had ordinary people in middle class not been
denied their fair share of the national output, they would not have been forced
to resort to deceitful means of making money and hiding it for tax benefit
The political debates should address this issues related to UE with
attention to the strengthening of American households, especially those in
middle class, and the overall good of the economy rather than on politics and