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The pros and cons of an underground economy

Marketplace Staff Sep 20, 2011

The pros and cons of an underground economy

Marketplace Staff Sep 20, 2011

Bob Moon: When we talk about unemployment here in the U.S., there are things we know — some of us, all too well. The unemployment rate holds steady at 9.1 percent. And there, we netted no additional jobs in the month of August.

And then, there are the unknowns. What about the folks who work off the books? People making cash in what’s known as the underground economy. Sudhir Venkatesh is a professor of sociology at Columbia University who studies the underground economy. Thanks for joining us.

Sudhir Venkatesh: Great to be here, thank you.

Moon: First off, a definition of what we’re talking about by the “underground economy.” That conjures up the black market, in a way. It’s not illegal behavior, though, is it?

Venkatesh: No. We can split the underground economy into two different sectors, and as you’re saying, one is the criminal side. But there’s a lot of stuff that’s out there that is not criminal by any means, it’s just that the income is not reported to the government, so people who are cutting hair inside their house, some people are may prepare your taxes. So that’s probably even a greater percentage of the activities and the income that’s in the underground economy.

Moon: Given that it’s not reported, I’d assume it’s not easy to come up with concrete numbers about the size of the underground economy, but what do we know about how it’s grown in the past few years?

Venkatesh: You put 10 economists in a room and you ask them to define the underground economy or the size of it, and you’ll get 11 different estimations.

Moon: I’ve heard that before.

Venkatesh: And I’ll just give you a couple. If you just do it relative to GDP, the economist Friedrich Schneider estimates that it’s about 8 percent of GDP. There’s studies by the G.E.O. that suggest that one out of every six purchases is made in the underground economy. We do know though that there are things, however, that make it grow. In a tightened regulatory climate, businesses will often switch to underground economic relationships, meaning that they might have paid you on the books one day, and over time, if they start fearing that they’re going to have to pay more taxes, they’ll change to an informal relationship with you.

Moon: Have you seen changes as a result of the recession, both in terms of the underground economic activities and the types of people who might be engaging in them?

Venkatesh: I think there is certainly a driver in the recession and that it will lead to overall increases in the underground economy. But you just don’t know how it’s going to affect particular kinds of groups. So that in a service sector environment where so much of their costs are based on manpower, you’ll see a greater reliance on casual hiring. In a manufacturing sector, you may not have that same kind of relationship.

Moon: You’ve interviewed lots of people who are doing this type of work. Any stories particularly striking?

Venkatesh: I remember going to Chicago and seeing an elaborate network whereby that small businesses in the South Side of the city took out cash altogether as a means of interacting with each other. There was an auto repair shop in which Leroy, the owner of the auto repair shop, he just no longer had a cash register. His customers would come in, they might pay him with a cell phone or they might pay him with the promise of painting his house. He would take that note and he would exchange it for someone else. They just simply did not have the cash to make payments. And you would have never seen that if you just walked in and made a purchase. And I think that shows the ways in which the underground economy is quite invisible, but it teaches us a lot.

Moon: The black market always exists, whether the economy is doing poorly or not. Should we be concerned by these types of activities or is it just an alternative way to make a buck in tough times?

Venkatesh: Because the underground economy is invisible, it is something that you don’t report to the government, you may feel over time that you’re doing something wrong. Then you start to feel like you don’t have value as a worker, as a laborer. That means that that same person, when times get better, might have difficulty going into an employer who says, ‘well, so what have you been doing for the past year?’ It becomes difficult to say, ‘well, I’ve been painting houses in the underground economy.’ And so you might have to make up a story or you may just avoid the question altogether — or worse you might avoid the interview, and that’s the worse thing. Those are the reasons that we don’t want the underground economy to be thriving.

Moon: Sudhir Venkatesh is a professor of sociology at Columbia University. Thanks for being with us.

Venkatesh: Thank you for having me.

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