While most of the Los Angeles economy has stagnated since the last recession, one segment is booming, a new analysis contends. The problem is, it's all underground.
Cash-pay, off-the-books work is thriving in the region, fed by new business practices, illegal immigration and lax labor law enforcement, according to the Economic Roundtable, a Los Angeles research group. That keeps thousands of low-skilled workers employed, but the jobs are generally unstable and low-paying, and they cheat the state of taxes and workers' compensation insurance premiums, said economist Dan Flaming, who prepared the report.
"This seems to be our area of growth, and that can't be a good thing," Flaming said.
The findings, supported by a variety of measures, are no surprise to worker advocates in a range of industries with large immigrant work forces, including the construction, apparel, janitorial and tourism industries. The phenomenon also has been acknowledged by state labor officials, who are redirecting their enforcement efforts to staunch the growth.
"It's huge," said Steve Smith, director of the state Department of Industrial Relations, which enforces labor laws. "It's bad enough on the people who work in it, because there is much greater potential for abuse [of wage, hour and safety laws]. But those employers also compete with legitimate firms, driving the good employers out of business."
By its nature, the underground or informal economy is difficult to track, let alone control. There are no hard numbers available on jobs or lost taxes. And one economist urged caution. Although he had not seen the latest report, Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto, said past claims of informal sector growth have proved to be "hugely overstated."
Daniel Mitchell, a UCLA labor economist, said the trend would not be surprising given the region's strong draw of undocumented immigrants, which could account for at least one-tenth of the area's work force. "You often find this phenomenon in less developed countries," he said. "Some have said we're now importing that characteristic."
The study examined the gap between payroll tax records and jobs reported in worker surveys, and adjusted the number for various factors, including worker commuting patterns, self-employment and people who hold multiple jobs.
Taking these and other factors into account, the report said the informal sector could range from 9% to a startling 29%, although Flaming said the true number is probably somewhere in the middle of the two extremes.
One thing is clear, he said: The underground economy is growing fast in Los Angeles, while the national and state economies are moving in the opposite direction. "The evidence suggests that Los Angeles County is indeed undergoing a transformation of its economy, whereby a large number of jobs are 'going underground,' leaving workers with limited rights," he wrote in the briefing paper, to be released today.
Flaming came across the trend when comparing employment data from two sources: state payroll numbers supplied by employers and worker surveys conducted by the federal Bureau of Labor Statistics. The numbers steadily grew apart in L.A. County through the 1990s, with official employment stagnating while growing numbers of workers reported holding jobs.
He also compared national employment ratios with those in Los Angeles to identify sectors where off-the-books employment seems especially large. Not surprisingly, they include agriculture, private household services, food manufacturing, construction and eating and drinking establishments.
The region pays a high price, Flaming maintains. Using an informal employment rate of 15%, and setting wages at $7,200 a year, he estimates the state loses about $1.1 billion in payroll benefits, such Social Security taxes, workers' compensation insurance and unemployment insurance. He said the workers also would lose about $1.5 billion in federal earned income tax payments.
Last month the International Monetary Fund expressed similar concerns in an issues paper, saying "shadow economies" appear to be growing throughout the world, accounting for as much as 77% of the gross domestic product in Nigeria, for example. The share of the economy in developing nations normally ranges from 35% to 44%; it is far lower in industrialized countries. The IMF estimated the informal economy in the United States at 10%.
"An increase in the size of the shadow economy is likely to result in reduced state revenues, which in turn reduces the quality and quantity of publicly provided goods and services," the IMF report said. "Ultimately this can lead to an increase in tax rates for firms and individuals, quite often combined with a deterioration in the quality and administration of the public goods such as roads and hospitals provided by the government."
Acknowledging the potential problems, California created a task force to combat the informal economy in 1993, combining investigators from the tax board, criminal justice, labor law enforcement and job development to target problem employers. Smith, the DIR director, said those efforts will be enhanced by combining many of those departments under one cabinet-level Labor Agency, which is planned to start in midsummer.
Flaming said enhanced enforcement is essential for reducing the informal economy, and that education and training, immigration reform and greater union organizing among low-wage workers also would be helpful. In any case, he said, public debate and initiatives are needed. "The problem doesn't seem to be curing itself by not talking about it."
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Under the Radar
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