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Underground Economy

Updated on July 14, 2024 , 846 views

The “underground Economy term”, also known as “shadow economy,” refers to those transactions of products and services that are not reported to the government. Such kinds of transactions are, therefore, generally beyond the reach of tax regulators and collectors.

In other words, the underground economy term is the one in which economic transactions that are considered illegal, mostly because the goods or services being traded are deemed unlawful by the government.

Underground Economy

However, another reason might be that these economic transactions Fail to address or comply with the government’s reporting requirements. In such a case, the activities being carried out may be legal, but the transactions are made without paying any Taxes or securing the necessary licenses.

Some examples of legal activities performed in the underground economy include the barter system or an unreported Income gained out of self-employment. On the other hand, a few illegal activities are trading in stolen goods, drug dealing, smuggling, fraud, illegal prostitution, and illegal gambling.

Factors Encouraging Underground Economic Activities

Some of the major reasons that tend to unreported economic activities include strict regulations, excessive taxes imposed, state monopolies interfering with Market exchanges, and price controls.

Besides, the government’s or the authority’s failure to enforce strict private property rights may lead to underground economic practices. However, it is often difficult to detect or measure these underground or unauthorized activities, since these are not recorded in any of the governmental records.

Moreover, the underground economy is highly sensitive to market fluctuations as well as both national and global economies. And this is why it is subject to change and is quite unpredictable. Also, underground economic activities tend to grow during times of a Recession.

On the other hand, these activities may even tend towards shrinking due to the higher penalties being charged for tax evasion.

The size of these underground activities can be measured from the tax audits or sample surveys on the dealer or business, or they are estimated from labor force statistics and national Accounting records. Furthermore, one can determine the breadth of the Black Market activities by studying the amount of money spent in unauthorized transactions not reported to the government.

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Reasons for Underground Activities

Some common reasons for people working in the underground economy include -

  • Employers may have incentives like payment of payroll taxes, avoiding licensing requirements and government fees, and Labor Union involvement.
  • These underground and unreported activities are prevalent in countries, where holding a second job is considered illegal, such as in the European nations.
  • Most laborers get involved in such activities to make enough living, which is often not possible in a regular 9-5 job. And some do it because they don’t have a mainstream job at all.
  • Some people may not have the required skills, knowledge, documentation, or social networks to join a mainstream job.
  • It is often motivated by a desire to increase one’s income and avoiding income tax payments.
  • Many of the underground activities are carried out by undocumented immigrants, who may not get the required benefits like health care or are paid below the legal minimum wage benchmarks.
  • Some workers prefer to choose underground jobs since they often tend to pay more than mainstream jobs.
  • Some others choose underground economic activities as they offer them the required freedom and flexibility. On top of that, these jobs are generally temporary and irregular in nature, and often don’t come with strict contracts.
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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