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The Underground Economy Essay

908 words - 4 pages

Even though the Gross Domestic Product (GDP) is a measure of all “the market values of all final goods and services produced with a country during a specific period” (Gwartney, Stroup, Sobel, & Macpherson, 2013, p. 131), it is nonetheless an imperfect calculation. This is because of concealed trading of goods and services by certain individuals and corporations that are not counted in the GDP; thus, the GDP is understated by a “range from 10 percent to 15 percent of total output” (Gwartney, 2013, p. 144) in the United States alone. These hidden economic activities belong to the underground economy where “unreported barter and cash transactions take place outside recorded market channels, ...view middle of the document...

20) increases. Underground, or shadow economies are a double-edged sword in that while they provide the goods and services consumers demand, they carry negative repercussions in terms of the government’s ability to collect revenue for critical social services, leading to “higher budget deficits or tax rates” (Wiseman, 2013, p. 311). Ironically, it is the “tax and social welfare burdens [that are] the leading contributors to shadow economy size;” thus, as the “size of the government’s redistributive role increases the incentive to turn to the underground economy also increases” (Wiseman, 2013, p. 311).
While an expanding underground economy encourages a flow of inputs, it depresses productivity from the formal economy as labor and capital are absorbed in the underground. Economists are in dispute about the effects of an underground economy, whether it depresses economic growth or stimulates it through an increase in direct consumer spending from the underground labor market. Wiseman (2013) and Dell’Anno and Solomon (2008) argue that a high unemployment rate correlates to a growing shadow economy as the number of workers opt out of the formal workforce sector and enter into the underground market (p. 316 & p. 2537). Not too surprisingly then, is the fact that the labor rate parallels the size of the underground economy, and with it the “potential for huge fraud on the social welfare system as people who claim to be unemployed while they work the underground, claiming unemployment benefits, not paying tax, but riding free on public services” (Dell’Anno & Solomon, 2010, p. 2537). Receiving unemployment benefits and free services while working in the shadows raises overall income and is a major incentive not to work in the formal economy. No doubt driven by need,...

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