L.A's HIDDEN MONEY
It’s hidden in plain sight. Signs of L.A.’s
flourishing underground economy are everywhere, from the front of the Big Tomy’s
burger stand on the corner of Pico and Sawtelle boulevards, where day laborers
line up each morning, to kids’ birthday parties in Beverly Hills, where undocumented nannies
mind the children of the very rich.
There is also the drug trafficking on downtown’s skid row, or the bartender who
doesn’t report all his tip income to the IRS, or the painter who will update a
façade for $1,200 – if paid in cash.
All this generates billions of dollars, nearly all of it untaxed and
Underground commerce has always been a part of Los Angeles, a place where new arrivals, be
they from south of the border or parts east, have traditionally struck out to
reinvent their lives. But lately it’s been growing, and it’s being blamed for
everything from the loss of tax dollars to unfair competition. Politically, the
issue of illegal immigration came to the forefront during the recall campaign this
Last year, the UCLA Anderson Forecast estimated that the informal workforce had
grown to 14 percent of total L.A.
County employment, from 9
percent in 1989. Nationally, the informal workforce has declined precipitously
during the same period.
All of which plays havoc when trying to get an accurate pulse on the region’s
overall economy. Local unemployment data may not reflect actual levels of those
out of work – and thus prevent government officials from correctly identifying
what regions might need more, or less, public aid. Even determining the number
of businesses in an area becomes problematic because members of the underground
economy rarely file for business licenses.
“If more businesses are in the informal economy than in the legal economy, that
means the legal economy will be constrained,” said Joy Chen, deputy mayor for
the city of Los Angeles.
That’s a pretty big responsibility for someone like Agustina Mondregon to
shoulder. She can barely speak English, and the concept of an underground
economy is unfamiliar to her. Yet she has spent most of the last 15 years as
part of it.
For the last nine years, the mother of four has toiled in L.A.’s garment sector, sewing everything from
women’s skirts to men’s pants. Her pay, averaging $200 a week, was always in
Mondregon, who came to the United
States in 1988, hasn’t worked since filing a
grievance for unpaid wages against her employer last year. But her husband
still labors off the books as a gardener, while her two sons work as off-the-books
construction day laborers and her son-in-law works at a furniture factory.
“I don’t know anyone who is not working in a factory or gardening,” said
Mondregon through an interpreter.
Sizing up the underground economy and its impact on the mainstream is more
parlor game than hard science.
The UCLA Anderson Forecast’s estimate of 1.2 million “informal” workers –
people who may or may not work legally, but who do not show up on any payroll –
compares to an earlier study from the Economic Roundtable, which estimated from
as few as 486,000 to as many as 1.6 million – up to 29 percent of the total
Last month, L.A. Mayor James Hahn hired the Milken Institute and the Economic
Roundtable to conduct a yearlong study on the underground economy to get a
better handle on its effects on public policy.
“It’s hard to track any of this,” said UCLA Anderson Forecast economist
Christopher Thornberg, who authored last year’s study. “Nor I am sure we will
ever get a real handle on it.”
Most surveys of underground economies include so-called “black market” or
illegal activities, such as drug trafficking, counterfeiting and money
underground, like many other cities, has a healthy portion of these activities.
Indeed, Los Angeles
has become the epicenter for one segment of the drug trade – the production and
sale of methamphetamine. The region is responsible for 70 percent of the
“speed” found in other parts of the country, according to the U.S. Drug Enforcement
Yet much of what constitutes the underground economy doesn’t involve criminal
activity but rather a world of unreported and unregulated transactions.
A large part of this world, of course, is immigrants. There are at least
585,000 legal émigrés to the region, and the number of illegal residents is a
multiple of that figure.
Their skills vary greatly – from grunt laborer to electrician – but they hold
in common an inability to obtain mainstream employment, either because of their
undocumented status or lack of a Social Security number.
What businesses employ them? Often, it’s a firm owned by another immigrant,
sometimes in sectors such as construction, janitorial work or the garment
factories that operate in downtown’s fashion district and along Slauson Avenue in
Another area is retail – peddlers of pots door-to-door in the MacArthur Park
neighborhood, sidewalk retailers or vendors who rent out stands at mercados.
There are also low-wage services such as house cleaning and gardening.
But what’s often overlooked is the role of the mainstream population skirting
the line between what’s legal and what’s not. And sometimes, not even skirting.
It could be the neighbor who repairs cars in his backyard or runs a painting
business from his van, without a business license. Or the smalltime hip-hop
producer who makes “mix” tapes and sells them on the street. Despite rules to
the contrary, swap meet merchants say they routinely skirt sales and income tax
Or there are the businesses notorious for underreporting income or taxes, such
as restaurants and nightclubs.
“You have a lot of industries like construction, where it’s difficult to
estimate labor costs,” said Urban Institute researcher John Roman, who co-authored
a report on the underground economy. “People in those areas may naturally
For homeowners, a cash transaction can cut the cost of a product or service by
10 percent or more. For criminals, the underground economy gives them a place to
hide from law enforcement. For those trying to avoid taxes, these all-cash
transactions provide the perfect opportunity, with no apparent victim to the
Boon or bane?
While some consider the underground economy a cause for concern, others argue
that its existence is a market response to overly burdensome regulations,
government corruption or rising costs such as workers’ compensation premiums.
Unlicensed retailers along Santee Alley in downtown L.A., for example, provide shopping outlets
in areas that suffer from a dearth of mainstream retailers, according to
Montebello-based real estate consultant Jose Legaspi.
As for those who have difficulty entering the mainstream, the underground
economy provides jobs, which is better than alternatives like homelessness,
crime or living off the dole. Many of these off-the-book workers, after all,
are made up of young men with prison records, a group shunned by conventional
Even Daniel Flaming, president of the Economic Roundtable and among those most
concerned about the underground economy, says that much of its growth is a
function of illegal immigrants who have a tougher time breaking into the
“We haven’t given undocumented workers amnesty in decades and these informal
entrepreneurs don’t always have the skill set to learn how to join the
above-ground,” said Flaming. “We need to see them as a solution instead of as a
Meanwhile, state and local officials covet the hidden revenue streams that
could be generating taxes to pay for government services. The informal workers
themselves may pay a cost also, by toiling in below-par conditions sometimes
below minimum wage, and missing out on benefits such as federal earned income
tax credits. The Economic Roundtable estimates that informal workers miss out
on $1.4 billion in such credits every year.
“You’re losing in some parts of the economy and gaining in others, so it’s
difficult to tell where the flows are,” Flaming said.
While economists and public policy analysts have tried comparing income data
with total savings, the tough part is determining which data points reflect the
underground economy’s presence. Businesses that are fully in the underground
often don’t show up on surveys, and those that do may falsify their reports.
The state Employment Development Department, for instance, reports there are
83,000 housekeepers and other domestic workers in L.A. But according to Victor Narro of UCLA’s Downtown Labor Center,
the actual number is at least twice that.
“Sometimes these workers get paid half in cash and half in check,” said Narro.
“But you can’t tell that from the EDD data.”
Beyond numbers, all it takes is a stroll along Tabor Street in West
L.A. to understand how pervasive this world has become. Every
Thursday, a van filled with lawn mowers, leaf blowers stops by each home, with
the workers inside promising to trim back the growth and remove the dead
The price: Thirty bucks. Cash.
PostScript: In April, the
Society of American Business Editors and Writers recognized this and the rest
of the “L.A.’s
Hidden Economy” special package with its Best in Business Award in the Special Projects