In the final paragraph below is a letter to the editor of The New York Times regarding an article featuring government data indicating that the private sector of the U.S. economy showed about zero job growth over the last 10 years.
It is not widely recognized that the employment data referred to by the Times and related economic data understate the actual employment numbers due to the substantial increase in our “underground” economy which has resulted in large part from the influx of illegal immigrants in recent years. When jobs go underground they are not included in government employment data or tax rolls. The underground economy includes shadow employees or independent contractors who are doing work which generates income that is not reported to the appropriate governmental agencies.
Employers can save substantial money if they hired employees “off the books.” By hiring “off the books,” an employer can save on the employer’s share of Social Security and Medicare taxes, and federal and state unemployment insurance taxes as well as workers compensation insurance. The employer also saves on any employer contribution to health insurance as well as vacation, holiday, and sick pay that would otherwise be made to an “on the books” employee. The “off the books” employer may also benefit by being able to ignore laws which protect workers in different ways such as laws related to overtime, the minimum wage, the workplace environment, hiring and firing. Many employers have both “on the books” and “off the books” employees, and those who do hire “off the books” tend to be smaller businesses.
Employees also often like “off the books” working arrangements because they can thereby avoid paying social security taxes as well as any state and federal income taxes that may be due. Moreover, by working "off the books" both illegal and citizen employees can qualify for different kinds of welfare with their lower reported incomes. (For an example of billions of dollars of welfare for illegal immigrants with low reported incomes see blog of May 9, 2010 entitled "Child Tax Credits for Illegal Immigrants.") In addition, those workers who are illegal immigrants can thereby avoid having to come up with social security numbers that are not theirs or filing tax returns to claim income tax refunds against withheld amounts. Illegal immigrants, seeking to maintain a low profile, usually agree to off the books employment if it is offered, especially since in other countries such as Mexico working “off the books” is a widespread practice. An estimated 50% of current illegal immigrant workers in the U.S. are working “off the books” or as independent contractors who are not reporting income.1
The honest employers can be doubly penalized by 1) only hiring their employees “on the books,” and 2) only hiring employees who can legally work here (more expensive and perhaps less productive than illegal immigrant alternatives). For many small businesses, the choice is to violate various laws as their competitors are doing or go out of business. Thus illegal immigration is contributing to a significant growth of our “underground economy.”2 Increases in off the books work has a corrupting influence on our economy and society. Increases in off the books work undermines the basic honesty necessary for our tax system to function well and it tends to draw otherwise honest employers and otherwise honest citizen workers into its illegal workings which offer significant financial advantages to both employers and employees.
1 For obvious reasons it is difficult to obtain hard data on the percentage of illegal immigrants “working off the books.” For a discussion of how a 50 percent figure can be arrived at see Steven A. Camarota, “The High Cost of Cheap Labor,” Center for Immigration Studies, August 2004. Mexicans are very familiar with the concept of “working off the books” as that practice is the backbone of their economy’s “informal sector.” A description of the “informal sector” was given in Robert J. Samuelson, “Mexico’s Missing Prosperity,” The Washington Post, June 28, 2006: “It [the informal sector] consists of thousands of small firms – street vendors, repair shops, tiny manufacturers – that theoretically aren’t legal, because they haven’t registered with the government and often don’t pay taxes or comply with regulations on wages and hiring and firing. Almost two-thirds of Mexico’s workers may be employed in the informal sector, according to one rough estimate by the International Monetary Fund. The sector’s size might suggest great entrepreneurial vitality. The trouble is that these firms are small and inefficient. Because they’re technically illegal, they can’t easily get bank loans and can’t grow too large without being forced to pay taxes or comply with government regulations.”
2 See Robert Justich and Betty Ng, “The Underground Labor Force is Rising to the Surface,” Bear Stearns Asset Management, January 3, 2005.
To the Editor:
Re “Job Growth Lacking In the Private Sector” (August 8):
This article of Mr. Norris does not mention negative effect on the reported employment numbers by the growth of the “underground economy.” Tax avoidance by employers and employees and the willingness of illegal immigrants to work “off the books” for small employers or as independent contractors who do not report income have no doubt distorted the statistics quoted in the article. Moreover, it should be noted that when some employers start hiring “off the books” the financial advantages are so great that it puts considerable pressure on their competitors to also do so.
