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$2 Trillion Shadow Economy Not Counted in Jobs Numbers

Daily Ticker

The labor market is improving, and the shadow economy is growing too.

Jobs are being added at an average of 172,000 per month according to the Labor Department, slowly bringing the unemployment rate down. Consensus forecast is 7.5% for June, down from 8.2% a year ago.

At the same time, one persistent and disquieting theme of the so-called recovery is the staggering number of people who have dropped out of the labor force. The labor force participation rate was 63.4% in May, and it has been hovering around a 30-year low for more than a year.

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One explanation economists give is demographics: the baby boomers are retiring. And then there is the obvious explanation of a tough economy, with people going back to school to re-train or dropping out of the workforce because they are discouraged.

But one $2 trillion part of the equation that's missing is the growing shadow economy: A grey market made up of people who aren’t on the official payrolls but are finding ways to get by nonetheless.

“It’s important to note this is not the illegal economy,” Yahoo! Finance senior columnist Rick Newman tells The Daily Ticker. “We’re talking about people who are doing legitimate work that would be ordinary work if it were taxed, but they’re getting paid in cash.”

So this work is under the table and it’s not taxed as wages would be, and these folks are also not counted in the monthly jobs numbers.

Examples would be people working as consultants (in something like IT), drivers, people running small eBay (EBAY) businesses, nannies, and landscapers.

Estimates from a University of Wisconsin-Madison study put the underground economy at that $2 trillion mark for last year. That’s twice the amount estimated in a 2009 study.

When it comes to the economic impact, Newman cites economists' bewilderment over retail sales coming in much higher than they should be given the unemployment rate. That could indicate some stimulus benefit of the shadow economy.

On the other hand, according to USA Today, the IRS cites lost tax revenue because of unreported wages at about $500 billion for last year. That’s up from $384 billion in 2001.

So, is this trend typical during the recovery from a recession, or is this an unusual red flag warning us of some urgent structural changes needed to lift these workers back into the light? Check out the video to see Newman's assessment.

Regardless, it sure gives the idea of a "greying population" new meaning entirely.

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