The underground economy refers to money earned from illicit activities like prostitution and the sale of illegal drugs. But it also broadly refers to any unreported income, such as undeclared tips or gambling winnings, or under-the-table payments made to laborers like house painters and construction workers, whose wages may go unreported to tax authorities. Unreported income paid to illegal aliens or migrant workers also contributes to the underground economy.
Sep 30, 2014 For the first time, the American Gaming Association commissioned an economic impact report on the industry’s importance to the U.S. The numbers are big: —Direct employment of 570,000 people, with total jobs impact of 1.7 million (including.
- The underground economy refers to money earned from illicit activities like prostitution and the sale of illegal drugs.
- Analysts estimate that underground economic transactions account for one-third of the total economy in developing countries and slightly more than 10% of the total economy in developed countries.
- Because underground economic transactions go unreported, they distort the accuracy of a nation's gross domestic product, which consequently may adversely affect a government's monetary policies.
- The underground economy also causes billions of dollars in lost taxes.
The Underground Economy and GDP
Due to its cloaked nature, it's difficult to gauge the true extent of the money that changes hands through the underground economy (sometimes referred to as the shadow economy). However, analysts estimate that underground economic transactions account for one-third of the total economy in developing countries and slightly more than 10% of the total economy in developed countries. But because these transactions go unreported, they distort the accuracy of key economic measurements, such as the gross domestic product (GDP), which is calculated by totaling the following four components:
- Personal spending
- Business spending
- Government spending
- Net exports
Notice how the aforementioned metrics fail to take consider any transactions that occur within the underground economic system. This is significant because a nation's less-than-accurate GDP figure can adversely affect government policies that are influenced by GDP numbers. For example, the U.S. Federal Reserve Bank relies on GDP figures set interest rates and create other monetary policies. If GDP numbers aren't technically accurate, such policy decisions can have a weaker impact, or negatively impact the economy.
Taxation is another major governmental concern related to the underground economy. A 2011 study determined that if all underground economic activities were legitimately taxed, it would generate $400 billion to $500 billion in annual revenue. That money could go a long way in rebuilding infrastructure, funding schools, and supporting other worthy causes.
Ways to Mainstream the Underground Economy
Fortunately, there are a number of steps governments can take reduce the effect that underground economic activity has on skewing GDP numbers. Reductions in personal income tax rates can encourage individuals to report income more accurately and completely. And then there's the tough love approach, where the installation of increased tax evasion penalties can discourage underreporting. Thirdly, a government may legalize certain underground economic activities, such as gambling and prostitution, as a way to legitimately tax the associated income, and increase revenue. Finally, governments can stimulate the creation of higher-paying legal jobs, which would theoretically shrink the underground economy.
As a result of gambling, some are driven to extreme lengths to cover debt. Severely addicted gamblers spend most of their energy following their addiction. They cost companies loss of productivity and profit. Gamblers themselves may suffer from depression and bankruptcy. Some may go into severe debt and suffer anxiety because of it. The social costs to society are varied and include unemployment benefits, family services and medical treatment to gamblers.
During times of economic success, casinos tend to take labor supply away from neighboring businesses. Since casinos offer higher wages than regular neighboring businesses, such as restaurants, employees leave the neighboring business and works for the casino. Customers who normally go to the neighboring restaurants now instead go to the casino for food. This demonstrates how not all growth by a casino can be attributed as economic growth; sometimes casinos merely transfer growth from other businesses into their own.
Gambling provides jobs since all commercial games require labor. Casinos require intensive labor including security guards, technical support staff, gaming staff, among others. In 1996, around 300,000 employees earned a total of US$7.7 billion within the US nation. This number does not include those who are indirectly involved with gambling, such as racing organizers. Employment resulting from gambling is difficult to estimate since gambling involves employees in many different stages. Entertainment is interlinked with gambling as well, for instance, the many shows available in casinos in Las Vegas. Hotel services and chauffeurs are also in higher demand because of gambling. Gambling increases aggregate demand for goods and services in the economy. In 1996, Americans spent one in every ten dollars on commercial gaming. This money goes directly toward stimulating the economy. This expenditure on gambling can also be magnified when considering the multiplier effect.
Reasons for gambling institutions
In a study by Grinols, it was found that in the US, even though a state may not want to support a gambling institution, it would be economically beneficial for them to do so. If they did not support the institution, there would be many repercussions. This is because, neighboring states have gambling institutions. Residents of the local state will travel to these institutions and gamble nonetheless. This would take away profit and revenue form the resident state. Since these gamblers will gamble anyway, it is economically beneficial for a state to allow and support gambling institutions.
How Gambling Benefits The Economy
Another study compared personal income to personal gambling expenditure and found that gambling occurs whether or not the country is in a recession. This aspect will attract states to invest in an institution that is basically recession-proof. During the Early 1990s recession, GGR (Gross Gambling Revenue) increased 9.4% even though the recession slowed personal income to 5.95%. This shows resilience of gambling to the effects of recessions.
- ^Grinols, E L. (2004). Gambling Economics: Summary Facts. USA: Baylor University.
- ^ abGrinols, E L. (2004). Gambling in America: Costs and Benefits. Cambridge, UK: Cambridge University Press.
- ^ abChristiansen, E. M. (1998). Gambling and the American Economy. Annals of the American Academy of Political and Social Science, 556(1), 36-52.