How large is the shadow economy? - Marketplace (2024)

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Tom Green asks:

How large is the underground economy — the cash exchange for goods and services, such as waiters’ tips, that are not reported to the IRS?

This shadow economy is made up of street vendors, musicians, babysitters, farm workers and anyone else who may not report income to the government.

Some people call it the shadow economy, the underground economy, the informal economy, the clandestine economy or the gray economy. Whatever you call it (we’ll go with “shadow economy” from here), it’s worth trillions. One expert told us it could be worth as much as 10% of U.S. gross domestic product.

“It’s really sizable. I mean, if you think about it, that would make it right about the third-largest economy globally, behind the U.S. and China,” said James Saunoris, who’s studied the shadow economy at Eastern Michigan University.

The thing is there’s no agreed-upon definition of the shadow economy. The International Labour Organization says it’s “all economic activities by workers and economic units that are — in law or in practice – not covered or insufficiently covered by formal arrangements.”

The shadow economy can include any sale of goods between two individuals, said Kim Vu-Dinh, associate professor at the Mitchell Hamline School of Law. Think Craigslist and Facebook Marketplace.

Saunoris said he excludes criminal activity in his research, although not every economist does. “The reason why the focus may be on the non-criminal sector is because these activities would be considered part of GDP had they been reported. In other words, these activities may be considered ‘socially valuable,’” Saunoris said.

For some disenfranchised people, it might be the only “real choice” they have to earn a living, Vu-Dinh said.

“This is an economy that exists out of necessity for some people, not just a frivolous desire to evade the law,” Vu-Dinh said.

Early in the 21st century, the global shadow economy was estimated to generate $10 trillion worth of economic activity, according to the publication Foreign Policy. These days that figure is likely closer to $15 trillion, Saunoris said, based on World Bank data and GDP estimates from researchers. .

The U.S. shadow economy is about 10% of the country’s GDP, which means that it generates $2.5 trillion worth of economic activity, Saunoris said. But these are just estimates.

“You’re trying to measure economic activity that doesn’t want to be measured,” Saunoris said.

For example, U.S. employers failed to report a total of $6.3 billion in tip income for the 2016 tax year, according to the Treasury Inspector General for Tax Administration. Full-service and limited-service restaurants accounted for $4.8 billion in unreported tips, while the amusem*nt and recreation sector (which includes golf courses and gyms) accounted for $838 million in unreported tips.

The shadow economy is often more accessible and flexible, providing opportunities to less educated workers, folks struggling during economic downturns, undocumented immigrants, people of color starting their own businesses and women who want greater job flexibility, experts told Marketplace.

But there are downsides. The shadow economy hinders the government’s ability to collect taxes, which can in turn reduce the quality and quantity of public goods; prevents employees from obtaining health insurance; creates unfair competition and distorts macroeconomic statistics, Saunoris said.

Properly accounting for the shadow economy could raise the GDP and lower the unemployment rate, Saunoris said. And that has implications for policy making: for example, the Federal Reserve uses GDP as one metric when setting interest rates.

Some employers also keep workers off the books so they don’t have to pay taxes or workers’ compensation, Vu-Dinh said.

And employers might exploit under-the-table workers by paying them low wages. There’s also no recourse for workers who get hurt or die on the job, said Amy Schoenecker, an assistant professor of political science at the University of Hartford.

While undocumented workers in the U.S. pay billions into Social Security, they do not receive benefits since they don’t have Social Security numbers and aren’t authorized to work in the U.S. Some countries have what’s called a monotax, which allows informal workers to still receive social welfare benefits, Schoenecker said.

“So much of the informal economy is hidden, which is why it’s hard to understand, but we benefit from it,” Schoenecker said. “We are all attached to it, or have been involved with it at some point.”

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How large is the shadow economy? - Marketplace (2024)

FAQs

How big is the shadow economy? ›

Among developed countries like the U.S., the size of the shadow economy is estimated to be about 6% of GDP, which amounts to approximately $1.4 trillion of economic activity that is unrecorded (Medina and Schneider, 2019). However, it is not obvious what is driving all this economic activity underground.

How big is the black market economy? ›

In the U.S. unreported income is estimated to be $2 trillion resulting in a "tax gap" of $450–600 billion. The "unrecorded economy" circumvents the institutional rules that define the reporting requirements of government statistical agencies.

How do you calculate shadow economy? ›

Relating total nominal GNP to total transactions, the GNP of the shadow economy can be calculated by subtracting the official GNP from total nominal GNP.

What is an example of a shadow economy? ›

Hence, the shadow economy comprises all economic activities that would generally be taxable were they reported to the tax authorities. See Table 1. Trade in stolen goods; drug dealing and manufacturing; prostitution; gambling; smuggling; fraud. Barter of drugs, stolen, or smuggled goods.

How large is the economy? ›

Economy of the United States
Statistics
GDP$28.78 trillion (nominal; 2024) $28.78 trillion (PPP; 2024)
GDP rank1st (nominal; 2024) 2nd (PPP; 2024)
GDP growth2.1% (2022) 2.5% (2023) 2.7% (2024f)
GDP per capita$85,373 (nominal; 2024) $85,373 (PPP; 2024)
44 more rows

How much is the economy worth? ›

In 2020, global GDP amounted to about 84.96 trillion U.S. dollars, two and a half trillion lower than in 2019.

How big is the black market? ›

The black market is an underground economy that is not government-regulated. It is estimated to be worth around 2.55 trillion dollars and is one of the biggest contributors to addiction globally.

What is the world's largest black economy? ›

The average size of the shadow economy of the 158 countries over 1991 to 2015 is 31.9 percent. The largest ones are Zimbabwe with 60.6 percent, and Bolivia with 62.3 percent of GDP.

How big is the illegal economy? ›

The U.S. shadow economy is about 10% of the country's GDP, which means that it generates $2.5 trillion worth of economic activity, Saunoris said. But these are just estimates.

How do you calculate the size of a shadow? ›

Use the formula s = h/tan A to calculate shadow length. See the table below for an example. Sun angle calculators are available on the Web which will provide the sun angle (A) and azimuth angle for a given location based on the date and time.

What is the problem of shadow economy? ›

The shadow economy also fosters unfair competition, as businesses operating within the informal sector enjoy an advantage over compliant businesses due to lower operating costs and tax avoidance. This can deter formal businesses from operating legitimately, further exacerbating the problem.

How is the size of a shadow determined? ›

The closer to the light source an object is, the bigger the shadow will be. This is because the object blocks more of the light. The further away from the light source an object is, the smaller the shadow will be.

How do you calculate shadow price in economics? ›

To calculate the shadow price of a project, you need to perform a cost-benefit analysis (CBA), a process which systematically compares the benefits and costs of a project from a social perspective.

How deep is the shadow economy? ›

Underground economies are a familiar scene in nearly every country, but they are most prevalent in less- or under-developed areas. In the U.S., it is estimated that the underground economy averages between 6.4% and 12% of GDP. They can reach more than two-thirds of a country's GDP in other areas.

What percentage of GDP is the shadow economy? ›

BCG analysis, based on IMF data covering more than 150 countries, has found that, on average, countries with lower GDP per capita have larger shadow economies—typically accounting for more than 30% of GDP per capita.

Which country has the biggest shadow economy? ›

The average size of the shadow economy of the 158 countries over 1991 to 2015 is 31.9 percent. The largest ones are Zimbabwe with 60.6 percent, and Bolivia with 62.3 percent of GDP. The lowest ones are Austria with 8.9 percent, and Switzerland with 7.2 percent.

What is the weakest economy in the world? ›

World's Poorest Countries 2024
RankCountry/TerritoryGDP-PPP per capita ($)
1🇸🇸South Sudan455
2🇧🇮Burundi916
3🇨🇫Central African Republic1,123
4🇨🇩Democratic Republic of the Congo1,552
123 more rows
May 6, 2024

How much of the GDP is the underground economy? ›

Underground economies are a familiar scene in nearly every country, but they are most prevalent in less- or under-developed areas. In the U.S., it is estimated that the underground economy averages between 6.4% and 12% of GDP. They can reach more than two-thirds of a country's GDP in other areas.

What is the smallest economy in the world? ›

The small island nation of Tuvalu has the lowest GDP in the world. The poor economic standing of Tuvalu is mostly due to a lack of industries and natural resources within its territories.

References

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