Los Angeles Business Journal • Dec. 15, 2003


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 unregulated.

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 fall.

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 cash.

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.

Underground workforce

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 workforce.

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 laundering. L.A.’s 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 Administration.

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 South Central.

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 requirements.

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 prefer cash.”

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 crime.

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 employers.

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 mainstream.

“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 problem.”

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 leaves.

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 Category.