These examples include babysitting, construction, and gambling. The underground economy also affects the consumers and the employees of a business. The employees miss out on employment insurance premiums since when the company does not pay taxes on wages, they do not pay into employee insurance premiums.

The increase of tax burden and social security contributions is the most important factor behind the increasing underground economic activities. As it is known, taxes affect labor-leisure choices of economic agents and also encourage labor supply towards to underground or untaxed sector of economy.

Most of these are people who lack the skills, social networks, or documentation necessary to obtain jobs in the mainstream economy. The jobs held by these people, many of whom are undocumented immigrants, often pay below the legal minimum wage and fail to comply with government standards of health and safety.

Underground economies exist in every kind of economy; the high, low, middle, or transition economies. Many factors contribute to this economy, including high tax burdens, rigid labor market regulations, government incapacity to enforce rules, and inadequate services.

The term may refer either to illegal activities or to ordinarily legal activities performed without the securing of required licenses and payment of taxes. Examples of legal activities in the underground economy include unreported income from self-employment or barter.

Shadow Labor Force Others work only in the shadow economy, either because they find it more profitable to do so or because they are barred from the official economy—as is the case for illegal immigrants, for example. In the European Union in the late 1990s, 20 million people engaged in shadow economy activities.

Key Takeaways While estimates vary, some put the underground economy at 11% to 12% of U.S. gross domestic product (GDP), or roughly $2.25 trillion to $2.5 trillion.