The world’s $10 trillion shadow economy is thriving, and half of the world’s workers are taking part.
The shadow economy, an underground economy which circumvents conventional rules of commerce, is thriving in America and across the world. What exactly is it all about?
What is the shadow economy?
While the phrase shadow economy may sound demonic, in reality, it’s something that just about every laborer in the world is familiar with – “under the table” work.
By definition, a shadow economy is:
“The segment of a country’s economic activity that is derived from sources that fall outside of the country’s rules and regulations regarding commerce.” Investopedia
There is, however, one major difference between the shadow economy and a regular black market – its size.
In Greece, the shadow economy constitutes a whopping 25 percent of the overall economy, and in Bulgaria that number is about 31 percent.
While some of the specific economic activity within a shadow economy will inevitably be illegal, shadow economies are made up of far more than just drug deals and arms trades.
In fact, shadow economies encompass many services like nannying, food service, domestic workers, and housekeepers – all operating sans federal tax.
Why is the shadow economy booming?
Shadow economies are nothing new, but that doesn’t mean their size and scope has always remained static. In recent years, shadow economies have experienced a surge in activity – especially in America.
Since 2008, when America slid into recession, the shadow economy and the undocumented work that it spurs have blossomed.
According to the Federal Reserve, since 2007, the amount of cash (physical bills) has surged, jumping from $803 billion to $1.18 trillion in 2013.
Economists have noted that while some of such cash may be held outside of the country, if even a small percentage of it remains in the US, that number is indicative of just how large the shadow economy in America has become.
So, what are the forces driving the underground economy forward? There are a few of note to take into account:
- Unemployment – studies have shown a strong relationship between unemployment rates and the vitality of the shadow economy. That is to say, whatever a real economy lacks in times of economic duress, a shadow economy attempts to compensate for.
- Increased taxation – naturally, when taxation increases, so too does the incentive for using illegitimate labor. In step with increased taxation and regulation around the world, the shadow economy has grown.
Shadow economies are big, and in some cases even booming. But what exactly is their effect on the greater legitimate economy? That question remains a point of contention even for IMF economists.
While one camp claims that shadow economies negatively affect the legitimate economy by decreasing the amount of taxable income and services which generate capital for public projects, the other isn’t so convinced.
An equally large number of economists claim that shadow economies allow for a more dynamic economy that allows for greater entrepreneurism and even the creation of new markets and revenue.