Arnold Kling  

Anecdotes of an Informal Economy

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Victor Davis Hanson writes,


There is a vast and completely unreported cash economy in Central California. Tile-setters, carpenters, landscapers, tree-cutters, general handymen, cooks, housekeepers, and personal attendants are all both finding work and being paid in cash. Peddlers (no income or sales taxes) are on nearly every major rural intersection. You can buy everything from a new pressure washer to tropical fruit drinks. For this essay, I stopped at one last week and surveyed their roto-tillers, lawn mowers, and chain saws, new and good brands.

New "restaurants" are sprouting all over the highways -- mobile stainless-steel encased canteens with awnings and chairs set up along the road. And yet for all the cash economy, it seems almost everyone in the food stores and doctors' offices are on food stamps, Medi-Cal, and rent subsidies. A carload of people drove in last week, inquiring about a house nearby; the occupants assured me that they had county housing vouchers.

...Cash wages have meant augmented entitlement money and are competitive with those who are formally employed and who pay 30% of their money in payroll, health care, and federal, state, and local income tax deductions. The result is an odd sort of poverty, in which superficially the unemployed and poor to the naked eyed are almost identical to the upper middle classes.

My guess is that those in the informal economy do not get to send their children to elite primary and secondary schools, and they have little in the way of health insurance. But otherwise, they enjoy what I call Diamond Age access to the more basic goods and a few luxuries.

When I took the subway home the other night, I noticed how many people wearing clothes that signified low incomes were playing with smart phones. A few years ago, the smart phone went with a business suit. Now it goes with lots of tattoos and grubby t-shirts.


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CATEGORIES: Income Distribution



COMMENTS (6 to date)
Troy Camplin writes:

My wife very quickly became disgusted with her work as a social worker because she kept doing home visits to people who lived far better lives, with a great deal more material well-being, than she lived. If they stopped buying Hummers, high-end cell phones, big-screen TVs, tons of jewelry, high-end handbags and clothes, and stopped getting hairdos worth hundreds of dollars and their nails done weekly, they could more than afford elite schools for their children -- except they do not value education at all, of course. Those are the facts nobody wants to discuss.

Stephen W. Stanton writes:

I can confirm that quite a few all-cash employees take home as much (or more than) their non-underground counterparts. NYC bartenders can make a dollar per drink. Pole dancers can make four figures on a very good night, but always at least three. There's always a decent paycheck for someone with a commercial driver's license and no criminal record.

As for standards of living... Why would they be any worse than a secretary or auto mechanic in a dealership? And that's before public assistance of any kind. I know people who paid their way through college, including tuition, room, board, and their own auto by working off the books... Without taking loans.

Floccina writes:
Cash wages have meant augmented entitlement money and are competitive with those who are formally employed and who pay 30% of their money in payroll, health care, and federal, state, and local income tax deductions.

Add to the 30% the overhead of the bookkeeping. A one man operation like that does no bookkeeping. IMO we need a much simpler tax system. Some informal workers are collecting unemployment, they can do quite well at least for a while and we befit because we can get stuff done cheap.

More people are working that the official statistics show.

Also to add to the comments of Stephen W. Stanton, I managed restaurants for years and the servers and bartenders never paid taxes on most of their tip income, which was most of their income.

IMO this:

they have little in the way of health insurance

Shows that some people value health insurance than do others. Also some people are beating the system getting health insurance from the state by not showing income some informal workers have it through spouses.

BTW I do not think that this informal work is bad except that it shows an inefficiency of our tax and welfare systems.

Hugh writes:

Here in Romania where I live the cash economy is estimated to be 40% of the total economy. Don't ask me how they came up with the figure because i have no idea.

The major downside to the cash economy is that it renders uncompetitive marginal businesses and employees that are obeying the rules.

biffpow writes:

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