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What is the Underground Economy?

Michael Pollick
Updated May 17, 2024
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When government agencies calculate economic figures such as the gross national product (GNP), they rely on information gathered from legitimate income reports generated by companies, non-profit organizations, and individual taxpayers. What these agencies cannot use in their economic forecasts, however, are the estimated billions of dollars in cash circulating through what is known as the "underground economy." This includes income generated through illegal means, such as prostitution or gambling, as well as legitimate but cash-based activities such as online auctions or bartering services.

The underground economy, also known as the shadow economy, has been in existence as long as its legitimate counterpart. The difference is that the government has any number of methods for tracking the exchange of goods, services and currency in an above-board economy, but very few ways of tracking the activities of a shadow economy. Prostitutes, gamblers and others earning illicit incomes are not likely to provide the government with accurate income information on their IRS tax forms, for instance, and cash-based transactions often work best without governmental interference.

As of 2010, this economy in the United States alone was estimated to account for over $2 trillion US Dollars (USD) per year in unreported cash holdings. It has also been estimated that up to 80% of all US $100 dollar bills printed every year end up overseas within weeks of their circulation. The underground economy supports any number of overseas operations, including covert wars, raw drug production, and human slavery rings. All of these illegal activities require an abundant amount of untraceable cash, preferably from a strong government with a stable legitimate economy.

This is not to suggest that every aspect of this economy revolves around criminal activity, however. There are also a number of legitimate occupations that largely work on a cash basis, and not all of that income is necessarily reported to the government. In the US, many states have laws requiring residents to pay sales taxes on products bought online, but few have the means to enforce them. Trade and bartering, whether in online auction websites or through classified ads, are almost always conducted in cash, and the exchanges are rarely reported as income.

The underground economy should not be confused with the black market, which deals strictly with illicit or illegal activities. A number of activities in this economy do fall into a gray area legally or morally speaking, but many cash-based businesses are considered legitimate, or at least work under the tacit approval of the government itself. Black market activities are almost always under the control of organized crime or corrupt governments.

Estimating the actual extent of the underground economy can be a very tricky proposition. Essentially, the US government observes financial changes in the legitimate economy, especially when it comes to the flow of hard currency. Assuming that most citizens' spending habits don't change much from year to year, any sudden increases or decreases in the amount of currency circulating in the legitimate economy are most likely the direct result of movements in the shadow economy. If a gambling operation suddenly ships 10,000 US $100 dollar bills overseas, for example, the effects of that loss would be felt in both economies.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Michael Pollick
By Michael Pollick
As a frequent contributor to WiseGeek, Michael Pollick uses his passion for research and writing to cover a wide range of topics. His curiosity drives him to study subjects in-depth, resulting in informative and engaging articles. Prior to becoming a professional writer, Michael honed his skills as an English tutor, poet, voice-over artist, and DJ.
Discussion Comments
By anon270214 — On May 21, 2012

Interesting that though the article was very clear in distinguishing between the underground economy (primarily legal) and the black market (definitely illegal), some comments missed the point.

Had it not been for the underground economy during the Nazi regime, more Jews and sympathizers would have been killed.

In urban America, allowing ones neighbor to 'rent' you a 350,000+ miles truck to go to the grocery store in exchange for babysitting is also part of the underground economy. Not everyone who's poor is dreaming of becoming a drug dealer or prostitute.

By anon215773 — On Sep 19, 2011

wonder what would have happened had the Jews not had an underground economy during their endurance of the Nazis?

By BrickBack — On Dec 03, 2010

I remember that movie. It was pretty gritty. Off the books the economy of the urban poor continues to be a problem.

People that are drawn to fast money do not realize the dangers that they can experience and many choose this lifestyle because they do not want to work a blue collar job and earn a modest salary.

You see this sometimes with young women that say that they had to become strippers so that they could pay their way through college. While working in a strip club is not illegal, many of these women do engage in prostitution and some get paid in cash which does not provide any records for the government.

These aspects are illegal, but again these types of women want fast money they do not want to work a part time job or apply for student loans to pay for their education.

I don’t think that you can ever put a value on dignity which these women clearly lack which is saddest of all. This sector economy will always be around as long as women agree to give up so much.

By sneakers41 — On Nov 30, 2010

The underground economy of the urban poor often entails illegal activity like drug dealing. Involvement in this elicit business is a very risky way for the poor to actually earn a living.

While they may receive large sums of money for selling drugs they run the risk of getting murdered or arrested at every turn. Sometimes the allure of “Easy money” is great and many young people that have given up on education pursue this illegal avenue rather than looking at legitimate means of earning a living.

The same could be said of members of the Mafia which totally define underground economy. The movie, “Good Fellas” was based on the true life story of Henry Hill who was an Irish American who was attracted to the gangster life at a young age.

The Mafia like any other illegal gang required its members to perform certain rituals in order to be fully accepted into the group and start earning money.

In this situation, Henry Hill came from a working class neighborhood whose parents held blue collar jobs and earned an honest living.

But like many that are attracted to the life of crime, Henry Hill felt that people that pursed legitimate work for so little compensation were “Suckers”.

His lifestyle in the Mafia did allow him a certain degree of wealth, but in the end he went into the witness protection program and has to fear for his life daily.

By sunshine31 — On Nov 28, 2010

Underground economy jobs can also be found in legitimate economy sectors such as farming and construction.

Here the illegal aliens often participate in this money economy but because they are illegal they do not receive the same protections that a typical American worker would receive.

Often these illegal workers are paid on a cash basis with no cumulative Social Security benefits. In addition, they usually work for less than the minimum wage because these employers know that the illegal aliens will do the work for those low wages.

It is estimated that about 11 million illegal aliens live in the United States, but it is more difficult to determine what portion of those 11 million people work deep inside the underground economy.

In the 1990’s, Spain had a reported unemployment of 25% which would be a depression of sorts but because the individuals engaging in the underground economy reported their status as unemployed so that they could receive government assistance the situation was not as dire as it seemed.

Michael Pollick
Michael Pollick
As a frequent contributor to WiseGeek, Michael Pollick uses his passion for research and writing to cover a wide range...
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