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America's 'shadow economy' is bigger than you think - and growing

The informal, or 'shadow,' economy is as big as $1 trillion. And in poor economic times, it's growing.

By Taylor BarnesContributor / November 12, 2009

Pedestrians cross Malcolm X Boulevard on West 125th Street in Harlem, near the Apollo Theater, in 2008. Malcolm X is home to a flourishing 'shadow' economy, informal business arrangements that are on the rise during the economic slump.

Scott J. Ferrell/Congressional Quarterly/File

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NEW YORK — A white sheet of paper tacked to a fence outside a Harlem church has one line written on it: Carlos lite-mover – mudanzas. It has a drawing of a truck and a phone number.

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A man’s voice answers the number. Yes, he’ll use his truck to move people’s belongings. It’s a way to earn some cash. Is this a registered business he reports for taxes? No answer. He quickly hangs up.

Inside the church, a moseying custodian says certainly, many of the women who come to the Thursday night meeting have informal businesses. They sell food and makeup from their homes.

A grandmotherly woman with a sweet smile arrives. “No,” she says, that’s not true. She quickly shakes her head with a furrowed brow.

Pinning down the informal economy is as tough as catching a fake Louis Vuitton vendor running from the police. But it’s huge in the United States – larger than the official output of all but the upper crust of nations across the globe. And, due to the recent recession, it’s growing.

Whether that’s good or not depends entirely on one’s point of view. The rise of the informal economy is either the flourishing of entrepreneurship among America’s poorest or a drag on legitimate businesses that play by the rules. Here, on Harlem’s Malcolm X Boulevard, you can find both.

Perhaps the biggest surprise about America’s shadow economy is its size. Long associated with colorful street hawkers in the developing world, the shadow economy makes up a larger portion of the economies of countries like Greece (25 percent) or Mozambique (more than 40 percent) than it does in the US. But because America’s economy is so much bigger, its shadow economy amounts to nearly 8 percent of its gross domestic product (GDP) – in the ballpark of $1 trillion, estimates Friedrich Schneider, an economics professor at Johannes Kepler University in Linz, Austria. That’s bigger than the GDP of Turkey or Australia.

There’s nothing particularly ominous about the shadow economy – at least, not the one Professor Schneider measures. He doesn’t include illegal activities like drug trafficking or counterfeiting. The transactions he looks at involve the legal production of goods and services that are not taxed and may violate labor laws.

Ironically, as recession shrinks the official economy, the informal one is growing.

“People have less ability to earn money in the official economy. They work in the shadow economy,” Schneider says. “It will grow this year by 5 percent, at least,” in the US.

Licensed and unlicensed on Malcolm X

Along Malcolm X Boulevard, street commerce is thriving. Vendors of incense, books, and nuts – many of whom have the proper licenses – line the sidewalks on a sunny day. One Harlem vendor is working doubly hard, dodging pedestrians as he runs with his cart along the street.

Why won’t he pick a corner and stop, like the licensed street carts? He has to stay on foot to avoid the police, he yells as he passes. Inside his cart: packages of white tube socks.

The positive view of such vendors is that informal work provides a space for entrepreneurship.

That fits with the findings of Robert Fairlie, an economist at the University of California at Santa Cruz. When he calculated his most recent “index of entrepreneurial activity” for 2008, he found an uptick in business creation in the US – but only at the lowest income levels.