Rising unemployment rates in the legitimate economy can lead to an increase in the shadow economy, as workers seek alternative ways to earn money. The shadow economy offers opportunities for those who are willing to engage in illegal activities, but some may not return to the legitimate workforce even if the economy improves.
While measuring the true extent of the shadow economy is still an inexact science, many economists believe that there is a tangible connection between unemployment rates in the land economy and subsequent increases or decreases in the shadow economy. In essence, when official unemployment figures rise significantly in the legitimate economy, the result is a larger pool of undocumented workers available for jobs in the shadow economy. Often this is a matter of financial survival for a certain segment of the population that does not qualify for unemployment benefits or other legitimate forms of help.
The rules governing employment in an aboveground economy can make it difficult for employers to avoid layoffs, downsizes, and hiring freezes. There are a number of marginal costs that must be absorbed by employers in addition to the actual wages paid to workers. Even an unskilled worker earning the U.S. minimum wage could cost the company twice as much in taxes, employee benefits, and other expenses associated with an above-ground economy. In reality, many of the jobs held by these unskilled or semi-skilled workers are not commensurate with the amount of money needed to keep them on the company’s payroll. That’s one reason official unemployment rates can rise, as smaller companies often drop workers from their wages to save on production costs.
This is where the shadow economy plays a major role in the fate of unemployed or seemingly unemployed workers. Businesses working in the shadow economy are not governed by the same financial and ethical rules as businesses working in a legitimate economy. Earning a living in a shadow economy is often based on personal productivity or ambition, not simply by marking time on a factory floor. Workers considered unskilled or semi-skilled in the land-based economy may find themselves in high demand in the shadow economy, provided they are willing to engage in illegal or illicit activities on a monetary basis.
When unemployment rates rise in the legitimate economy, it inadvertently creates a subculture of people who have become disillusioned or put off by the dearth of decent jobs. Unfortunately, their basic financial and personal needs have not changed, so many will look for work under the table or become self-employed in illegal professions such as prostitution, gambling or drug sales. Even if the legitimate economy regains strength, some of these workers in the shadow economy will not return to the aboveground workforce. Either they feel they are more successful in their illicit careers or they no longer have the skills or work ethic sought by legitimate employers.
One could argue that a substantial increase in official unemployment rates causes an equal but opposite increase in the shadow economy, but there is still hope that many of these displaced workers will return to the legitimate workforce once the initial appeal of the subway l economy has passed.
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