A shadow economy may be keeping the US afloat

$2 trillion in cash, untaxed earnings may explain why consumers can keep spending even with tax hikes and a slow jobs recovery.

By Aimee Picchi May 3, 2013 1:26PM

Image: Payment (© Tetra Images/SuperStock)Today's better-than-expected jobs numbers are just one outward sign of the economy's continued -- though sluggish -- recovery from the Great Recession. But there may be another explanation for why consumers keep spending more despite higher payroll taxes and more pain at the gas pump. 

That reason is a thriving shadow economy, estimated to have reached as much as $2 trillion last year, according to a study (.pdf file) co-written by Edgar Feige, an economist at the University of Wisconsin-Madison, and Richard Cebula, a finance professor at Jacksonville University. 

A shadow economy is one where workers turn to employment that pays under-the-table. While that sometimes includes illegal activity, such as drug dealing, much of the shadow economy today appears to be in areas like service work, such as babysitting, and working construction jobs for cash. 

A woman named Kevin Kalmes told Bloomberg that she started selling her belongings after getting laid off and receiving a foreclosure notice. She then started selling items for other people, calling her sale the "Little Shop of Hoarders." 

She turned to the idea after trying to find work for two years, with many of the job prospects paying significantly less than her previous work as a production manager. 

"At some point you believe that you have no value in the workplace," she said. "It’s like going through 25 boyfriends in a couple of years and saying: 'doesn’t anyone want to love me?'"

That kind of work may help explain some perplexing inconsistencies in economic reports. Retail sales have grown at an annual rate of at least 3.5% since September 2010, even though payroll taxes have jumped and jobless benefits have been whittled down -- and expired for many long-term unemployed. 

"The jobs are in service industries from small food establishments to landscaping." David Fiorenza, an economy professor at Villanova University, told CNBC. "Even the arts and culture industry is not immune to working off the books in areas of music and entertainment."

As a result, the underground economy has doubled since 2009, according to a study from a professor at Johannes Kepler University that CNBC cited. 

So, who's the loser in this scheme? The Internal Revenue Service, according to Feige and Cebula's study. As much as $500 billion in taxes aren't being paid on the $2 trillion in underground earnings, his study says. 

And the shadow economy may be poised to get even bigger. 

With Obamacare requiring large businesses to provide health care insurance to full-time workers, some companies, such as Regal Entertainment (RGC), are cutting back hours. In turn, those employees just might joins the millions who are already finding work in the underground economy. 

Follow Aimee Picchi on Twitter at @aimeepicchi.

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May 3, 2013 1:52PM
I always knew we had it in us.  I'd like to call it INGENUITY but it's probably closer to common sense.  Something no big government has ever had dating back to ancient civilizations.  Every time I read a story about the citizen cheating out big government I get this warm and fuzzy inside.  

If government just stuck to providing the basics we wouldn't even be talking about this.  Provide me infrastructure and safety nothing more.  Don't force me to save for retirement (social security), pay for my medical bills (medicaid, medicare), give me an opportunity to not have to work (section 8, food stamps, well fare, disability, etc. etc.).  Our founding fathers have to be turning in their graves over the size and scope of the US Federal, state, and local governments.  Remember one thing big brother "It's not a taxing problem, IT'S A SPENDING PROBLEM".
May 3, 2013 1:40PM
Shadow Economy huh?
Well, if you see the cash one minute, then its a shadow the next...

In all sobriety, the "shadow economy" will grow until Fair Tax
standards are implemented and the old code thrown out
along with a majority of the politicos in D.C. 

May 3, 2013 3:10PM
So the part of the economy that the government can't touch is saving the economy.  Just think what the economy would do if the government would get out of everyone's way.
May 3, 2013 2:24PM
these guys work only with cash. they get paid in cash and they only spend with cash. they have no credit or debit cards. no bank accounts. probably no retiremnet accounts either. they leave a small paper trail if any. they get no 1099's so they are invisible to the irs. they are stealth ninjas. they are brilliant. they make the rest of us look like the sheep we are.
May 3, 2013 2:09PM

So, who's the loser in this scheme? The Internal Revenue Service, according to Feige's study. As much as $500 billion in taxes aren't being paid on the $2 trillion in underground earnings, his study says. "


The Federal Government just borrows money to support its oversized self anyway. Guess who is on the hook for that......... Yep... You and I.

May 3, 2013 2:50PM
just proves a point. the government can go bankrupt, and disappear :) and We The People will be just fine!
May 3, 2013 2:51PM
I used to work as a waiter, and most tips was cash. Take one guess of how much of that I report to the IRS. I still get a warm and fuzzy feeling every time I think about it.
May 3, 2013 2:19PM
with all the taxes and regulations is it any wonder it's not even bigger?
May 3, 2013 3:00PM
Yes sir, and a mighty fine shadow economy at that.  Why waste our time given the ineptitude of our government when we can work with cash, leave no paper trail, and more than anything, we aren't supporting "freebie junkies".  See all you liberals, all you are doing is sitting on your butts and voting yourself tax increases.  All capitalist will survive no matter what jerk is in the Oval Office.
May 3, 2013 3:36PM

As a kid back in the late 1950's if it said made in the USA I knew it was perfect.

Driving over a cement bridge,you knew it was safe. Buying fresh meat and veggies,you

knew it was going to be good. If the President said something you knew it was the truth.


May 3, 2013 3:24PM
Anyone stupid enough to believe the "jobs report" needs to check out Shadowstats.com
Great, something is wrong when we have to stoop this low as to depend on a shadow economy to prop up the jobs recovery numbers, because Obama sure isn't doing it.
May 3, 2013 3:04PM
If to pay a baby sitter that we have to change 3-4 times a year, I have to jump through so many hoops and it increases the final cost for me, why would i do it. Not to mention that most baby sitters wont even agree if you want to pay them by check and by the book. If i am alowed to give them 1099 and call it a day and report their SSN on my returns, I would. But no, it is considered a full time emplyment and i have a deduct and submit taxes and everything else. No one want to do it and no babyistter wants to go through with it. SIMPLIFY I want to be on the right side of the law but please draw the line sensibly.
May 3, 2013 2:17PM
imagine what it must be in the euro zone, maybe up to 50%?
May 3, 2013 3:24PM

You have to take care of number one and those under your care.  Children need shoes now not when you finally score a job, the electric bill has to be footed now not a month from now when the first check comes in.  If someone needs to move furniture from here to there, and they need a hand, cash is welcome  or if you have a pick up truck, a couple of twenties will get the deed done...

Better keep ourselves a float and in so doing, the country will stay a float.

May 3, 2013 1:40PM
Seems like everyone with a pick up truck is now a scrap metal guy.
Wheres VL he has been all over this for months?
May 3, 2013 3:23PM
If i am paying the nanny or the celaning guy. I am paying them from my post tax salary money. I should not have to deduct the taxes for the payments i am making like i am running some sort of business. I am  not producing goods to sell and make profit that i need to account for all tax withholdings for employees and report. This is after tax money that i am spending to have my house cleaned or baby taken care of. This kinf of employment has to be considered separately and logical rules implemented.
May 3, 2013 3:20PM
The only problem is this - no social security withholding, so down the line these folks will have smaller SS benefit payments, but sometimes keeping the rent and the bills paid now takes priority . . . . one would hope that some of this "shadow" money will be invested in IRA's and other private savings accounts. 
May 3, 2013 3:13PM
The cleaning guy also needs cash. He wont clean our house otherwise. What to do. It is upto him to report his earnings, I just pay him 75 dollars every now and then to clean. Any company i hire for cleaning still employs these same guys but they want 200 dollars for the same thing, employ the same illegal people. I know cos the guy whi now cleans my house used to work for a company and he is illegal and did not make anymore than he makes working alone. Rip-off at every turn as soon as you try to take a legal route.
May 3, 2013 2:51PM
i will join the underground in 153 days that is when for me it will pay more to be on unemployment than to work...
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