The underground economy, also known as the shadow economy or black market, refers to economic transactions that are deemed illegal or unreported, either because the goods or services traded are unlawful in nature or because transactions fail to comply with governmental reporting requirements. The underground economy is not a single entity, but rather a collection of different types of underground activities that exist in both market-oriented and centrally planned nations, developed or developing. These activities are distinguished according to the particular institutional rules that they violate, including the illegal economy, the unreported economy, the unrecorded economy, and the informal economy.
The underground economy is difficult to measure because its activities are not included in any government records. However, estimates vary widely, with some putting the underground economy at 11% to 12% of U.S. gross domestic product (GDP), or roughly $2.25 trillion to $2.5 trillion. The underground economy includes any paid work or transaction that is not reported to the government and, therefore, is not taxed. Underground economies tend to exist in countries with high levels of taxation, government corruption, and regulatory barriers.
The reasons that underground economies exist are numerous, but trends indicate that how economically developed an area is dictates how strong (or weak) its shadow economy will be. Workers in the underground economy are often paid under the table and do not receive health insurance or workers compensation benefits, making them more vulnerable to exploitation. However, some argue that the underground economy can be beneficial, as it provides jobs and income for people who might not otherwise have access to them.
In summary, the underground economy refers to economic transactions that are illegal or unreported, and it is a collection of different types of underground activities that exist in both developed and developing nations. The underground economy is difficult to measure, but estimates suggest that it can be a significant portion of a countrys GDP. While the underground economy can provide jobs and income for people who might not otherwise have access to them, it can also be harmful to workers who lack legal protections and to social programs funded by tax revenues.
