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March 28, 2021

The rise of the 'underground economy'

By Jason Buckland, Sympatico / MSN Finance

Of all the people I know who got laid-off these past eight months or so, the running joke has always been, “Well, I guess it’s cash jobs only from this point!” – a playful nod to collecting your maximum employment insurance benefits while still making a little under-the-table money without the government knowing.

As it turns out, while they may not necessarily be avoiding the EI task forces, not everyone is kidding.

An Austrian professor has generated a series of estimates for how big “underground” economies – defined as “the legal production of goods and services, but withholding tax and social security payments” – have become in eight of the world’s richest nations. And surprise, surprise, the numbers are growing.

It’s thought now that underground economies account for somewhere in between 12-15% of Canada’s gross domestic product, up from the year before. In fact, there’s reason to believe all eight of the countries profiled for this thesis will continue to see an increase in off-the-books work in the years to come.

While Italy is tallied as the highest proprietor to informal work (at more than 20% of its GDP), the trend is even more rampant in the developing world as street vendors and cash-paid labourers dominate markets like India and other regions of Asia.

In Canada and the U.S., underground workers generally mean off-the-books maids, gardeners and “gypsy” cab drivers, according to the Wall Street Journal. The phenomenon isn’t nearly as prominent yet as it is in other parts of the world, but with employers slashing jobs and families’ incomes vanishing, it’s at least conceivable the pattern could continue to grow in the Western world.

Economists have, of course, been stressing the negatives aspects of underground economies for years.

“Informal businesses often don’t pay taxes, and they routinely lack the capital and expertise to be as productive as big enterprises, leading to less innovation and lower standards of living,” the WSJ writes. “Since informal workers lack health benefits and other safeguards, they have to save more for emergencies, resulting in less casual spending that further drags down (economic) growth.”

Still, you probably know someone who takes a few cash jobs on the side because, hey, there are a lot of people who could use some cash on the side these days. That idea led to my favourite take on the theory, a reader comment on the Financial Post’s blog site:

“So if the underground economy is 10-15% of (the) GDP, and the outright illegal economy is similar in size, are we 20-30% better off than the official numbers indicate?”



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...