Underground Economy: Definition & Examples

Underground Economy: Definition & Examples
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  • 0:01 Definition
  • 1:02 Industries Involved
  • 1:34 Consequences
  • 2:22 Enforcement
  • 2:47 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we'll learn about the underground economy. We'll look at some examples, who it hurts, and what is being done to stop it. This will be followed by a summary and quiz.

Definition

Imagine you are a mother of three young kids. After finishing your degree, you decide to go back to work. Because you and your husband will both be working now, you have to line up childcare. After countless interviews, you finally find the perfect nanny. You decide to pay your new nanny in cash each week. A year later, when you file taxes, neither you nor the nanny report her pay to the IRS.

You have then contributed to the underground economy, where goods and services are exchanged and are either under-reported, or not reported at all. The goods and services are sold through cash transactions, which makes it difficult for the government to monitor or even find out about them. Now, giving your neighbor's kid five bucks to mow the lawn isn't going to hurt anything, and the government is okay with a person earning a little bit of money and not reporting it. But if that kid is mowing the lawns of the whole city and making hundreds of dollars and not reporting it, that crosses a legal line.

Industries Involved

So, now that we know what the underground economy consists of, let's look at some examples. Because the underground economy involves cash transactions, there are some common places where they occur with more frequency. One of these is in the hospitality industry. For example, if you tip the gentleman who carries your bags at a hotel, typically neither of you will report that transaction on your taxes. Other industries that can also contribute to the underground economy include construction, retail, gambling, babysitting, and online auctions.

Consequences

So who can this economy be a bad thing? Well, when people do not pay taxes, many programs feel the effect. For example, programs that are paid for by taxes such as health care, employment insurance, and pensions, can all be negatively affected by unpaid taxes. From a business perspective, the underground economy can create an unfair and illegal advantage to those businesses that do not follow the laws.

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