The “gray economy” sounds like a way to describe the global economy over the past few years: foggy or cloudy, with intermittent rays of sunshine.
But what the gray economy actually refers to is the growing number of workers being paid under the table, without paying income taxes or contributing to such public services as Social Security and Medicare.
Data from the Internal Revenue Service and the state Employment Development Department indicate that in San Diego County alone, there may be between 140,000 to 180,000 workers in the gray economy, representing between 9 and 13 percent of local workers.
Those underground workers include both illegal immigrants and native-born Americans, and although most are working in low-wage jobs as maids, cooks, baby sitters and gardeners, economists say the underground economy also includes higher-paid professionals, such as freelance business consultants, accountants or architects.
Despite the influx of illegal workers from across the border, the United States has the world’s lowest percentage of workers in the gray economy, according to a study last year by European economists Friedrich Schneider and Andreas Buehn. Even so, the percentage of workers in the gray economy has been growing over the past couple decades, rising from 5.6 percent in 1996 to 8.1 percent in 2007. If that trend continues, it could create economic problems by not providing the tax revenue needed to provide social services.
“In general, the illicit economy does make it harder for governments to raise revenues,” said James Hamilton, an economist at the University of California San Diego. “When you’ve got too many people in the illicit economy, the only way you can tax them is through inflation. Nobody likes inflation, but nobody likes paying higher taxes or seeing their social services get cut either.”
Some economists say the rise of the underground work force is one reason why the Greek economy recently spun out of control, threatening to take the European financial system down with it. Portugal, Spain and Italy — the next countries in the row of dominoes that seem poised to follow Greece — also have large gray economies.
The Schneider-Buehn study estimated that in 2006, the most recent date for comprehensive data, the underground work force represented an average of 16 percent among the industrialized nations of Western Europe — or roughly twice the size of the gray economy in the U.S. — and 37 percent in the developing nations of Eastern Europe, Asia and Latin America.
“Right now, we’re in much better shape than most other countries and substantially below most countries in Europe,” Hamilton said.
The latest data from the Internal Revenue Service estimates that around 15 percent of the nation’s workers did not pay their income taxes in 2005, resulting in a $345 billion gap between the taxes that were paid and what should have been paid, although through audits and other enforcement levels, that amount has since been reduced to $290 billion.
The IRS does not provide a regional breakdown, estimating how many people fail to pay taxes within specific geographic areas. “It’s inherently tricky to measure something that’s illegal,” Hamilton said. But a comparison of tax payments in San Diego County to the local workforce hints that the gray economy is at least as big as the national average.