When I worked at 711 I had kind of a weird habit. I would get home late (1-1:30AM) and have some beers while chilling out. That is pretty normal but here comes the weird part. Since there is nothing on at 4AM I repeatedly found myself flipping all the way through the channels and stopped on a CSPAN interview with an author that seemed interesting for whatever reason. One of these was Sudhir Venkatesh. This quiet academic Indian fellow talking about the time he spent with a crack gang was interesting. I thought nothing of it for a long time.
Several months after that incident I ended up reading Freakanomics. One chapter of that book looked in depth at the economic info derived from Sudhir's work with the gang. I found that very interesting and a couple weeks ago I saw this book while trying to spend a gift certificate and get something to read in the field.
I read it and enjoyed the book a lot. At a bit under 300 pages it is a quick easy read. It is probably the only book I can think of that Wifey and I have read and enjoyed. Though it is admittedly off center of the topic of this blog (and by default what its readers enjoy) it is just plain a good read. I would say there are some pretty leftist sentiments in the book but it is easy enough to ignore a sentence here or there and doesn't detract from the quality of the book.
It did leave me with some more thoughts on the underground economy:
As has been previously noted people will hide their income if there are significant motivators to do so. The higher the motivation the more people will probably hide income. As shown in the book people needed to have a low enough incomes to stay in their government housing. This made a strong incentive to have some income be off the books. This is not that different from a white collar guy who forgets to mention the money he made on a side job to stay in a lower % tax bracket.
In addition to people being driven to the underground they will also do what is necessary to get things done. If the normal channels don't work to address significant needs people have they will go outside of them quick fast and in a hurry. This is true for people getting stuff in their apartment fixed or getting things they want (drugs, sex, guns, booze, whatever).
This also brought home that most undergrounders are working for pretty small stakes. Of the people in the book who worked in some underground capacity most made at most a couple hundred bucks a month. There are probably HUNDREDS of people mowing lawns, walking dogs, cat sitting, doing small home repairs, etc and making small money for everyone who makes 100K under a fake SSN or some sort of other underground way.
This leaves me with a couple thoughts. First of all it is a lot easier to have one foot in the underground economy then to dive deep into it. It would be almost impossible to prove (assuming you earned it underground and aren't stupid) that you made 47,500 last year instead of the 38,263 that was reported by your primary employer. Heck even if you made 30-40% of your income underground it would be fairly hard to prove without serious examination. Maybe your primary business somehow doesn't ever receive payments in cash (because you don't like dealing with the haste) or you have some sort of side job that is underground.
I think underground goes hand in hand with bargaining and bartering. This is in part because it is usually small businesses and one man kind of operations. You can bargain with Jimbo the car guy but you can't bargain with Les Schwabb. Also they are more of the wheeling and dealing type which makes them more open. They can see how getting $200 work of firewood for a $100 job is a good deal even though they don't walk out with 20's in the wallet. If nothing else they can swap the wood for something they do need that costs $150.
I think underground activity tends to happen mostly in clumps. Very rarely (I imagine) do you find one undergrounder in a sea of legit businesses. Undergrounders are created by certain sets of conditions that lead groups (though not together or in a planned way) to functioning outside the system.
From an abstract perspective the most interesting thing to me about the underground economy is that it is such a group of odd fellows. Any time you have little old ladies who watch kids to supplement their retirement, HS girls who walk dogs, tradesmen, prostitutes and drug dealers that would be an odd luncheon. The only thing these folks have in common is that for reasons of financial interest or legal necessity (I would love to see a W-4 that says the guy made $120,453 from managing crack sales) they do not report at least some of their income for tax purposes.