Will the Underground Economy Increase if Official Unemployment Rises?

Although measuring the true extent of the underground economy is still an inexact science, many economists believe there is a tangible connection between unemployment rates in the above ground economy and subsequent increases or decreases in the underground economy. Essentially, when official unemployment figures rise significantly in the legitimate economy, the result is a larger pool of undocumented workers available for jobs in the underground economy. It often comes down to a matter of financial survival for a certain segment of the population who do not qualify for unemployment compensation or other legitimate forms of aid.

The rules governing employment in an above ground economy can make it difficult for employers to avoid layoffs, downsizing and hiring freezes. There are a number of fringe costs which must be absorbed by employers in addition to the actual wages paid to workers. Even an unskilled worker earning the minimum wage in the United States could cost the company twice as much in tax obligations, employee benefits and other expenses connected with an above ground economy. In reality, many of the jobs performed by these unskilled or semi-skilled workers are not commensurate with the amount of money it takes to keep them on the company's payroll. This is one reason why official unemployment rates can rise, since smaller companies often purge workers from their payrolls in order to save on production costs.

This is where the underground economy plays a major role in the fate of unemployed or seemingly unemployable workers. Businesses working in the underground economy are not governed by the same financial and ethical rules as businesses working in a legitimate economy. Earning a living in an underground economy is often based on productivity or personal ambition, not simply marking time on a factory floor. Workers considered to be unskilled or semi-skilled in the above ground economy could find themselves in high demand in the underground economy, provided they are willing to perform illegal or illicit tasks on a cash basis.

When unemployment rates rise in the legitimate economy, it inadvertently creates a subculture of people who have become disillusioned or discouraged by the scarcity of decent jobs. Unfortunately, their basic financial and personal needs haven't changed, so many will seek out under-the-table employment or become self-employed in illegal occupations such as prostitution, gambling or drug sales. Even if the legitimate economy should regain its strength, some of these workers in the underground economy will not return to the above ground workforce. Either they feel they are more successful in their illicit careers or they no longer have the skills or work ethics sought by legitimate employers.

It could be argued that a substantial rise in the official unemployment rates does trigger an equal but opposite rise in the underground economy, but there is still the hope that many of these displaced workers will return to the legitimate workforce once the initial allure of the underground economy has passed.