Everyone should know by now about Greece’s latest bailout. To the average American, the details don’t matter. They really don’t even matter to the average reader of this website. We all know they borrowed too much and are now facing serious levels of austerity. The worry temporarily shifts from whether Greece can make their debt payments to whether they’ll fall into a depression from all the spending cuts.
And by official measures, Greece’s economy will get worse for the next year or so due to all the cuts in government spending. Among the cuts is a 22% reduction in the minimum wage and a lot more government jobs are going away, which was a significant portion of the economy. When you cut as much spending as Greece is being forced to do, the immediate effect on the economy is measurable.
But there are some things which aren’t normally accounted for in official measures of the economy. Parents with kids, do you ever hire a babysitter? Pay some teen in your neighborhood $40 to text her boyfriend and chat on Facebook while your kids eat ice cream and stay up late so you can go get a mediocre meal at Applebee’s and see a movie you’ll later regret? I doubt either you or “Brittianey” are reporting that transaction to the government. That’s a contribution to the shadow economy, and the shadow economy of the United States is estimated to be about 8% of the economy of the US depending on who you ask. Note: official GDP numbers do not include the shadow economy. Now that is significant, and larger than the official economies of many other major countries.
The shadow economy includes everything from a local business not reporting cash transactions to that guy down the street from you parent’s house that makes white lightning. When someone drops out of the official labor force, they could very well be happily employed doing cash transactions to install molding or be getting paid under the table to do editing for a website. And no, I dont, do that, its clear, I dont, have a, editor.
Unemployed doesn’t always mean you don’t have an income. And while 8% is huge here in the US, the shadow economy is a lot larger in Europe.
Image SourceMost every country in Europe has a greater portion of their economy operating outside of official figures. It’s the worst in many former Soviet states, but most of the PIIGS countries also have very high shadow economy rates. Italy’s shadow economy is practically the same size as Germany’s but with just about 60% of Germany’s legitimate economy. We’re all aware now of how important the Cosa Nostra is to Italy’s economy. Apparently, almost half of the people in Romania work on the black market too.
So when you hear about Greece’s unemployment rate being 21% and the economy suffering, things aren’t as bad as the numbers would lead on. Things aren’t apples to apples with numbers here in the US. Things are surely worse there, but 21% unemployment in a country with a 25% shadow economy isn’t the same as 21% unemployment in a country with only 8% shadow economy.
Is the shadow economy a bad thing? Supposedly. It would include stuff like human trafficking, contract killing, and drug smuggling which are all terrible. But other aspects like not reporting a cash transaction are mostly harmless (although the same cannot be said about that babysitter’s insistence on wearing jeans so tight it looks like she’s wearing a cream colored spare tire).
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
