Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Crash Edition - 26th Mar 19
Handy Ways to Boost Your Home Income - 26th Mar 19
US Treasury Bond Yield Inversion and Political Fed Cycles - 26th Mar 19
Golan Heights Oil all about the Shekels - 26th Mar 19
Falling Yields a Catalyst for The Gold Catalyst - 26th Mar 19
Can We Lock Up Rachel Maddow Now? - 25th Mar 19
Real US National Debt Might Be $230 Trillion - 25th Mar 19
Friday's Stock Market Sell-Off - New Downtrend or Just Correction? - 25th Mar 19
20 Days Left to Find Buying Opportunities In Gold - 25th Mar 19
Will the Historic Imbalance in Gold Stocks to Gold Price Resolve ? - 25th Mar 19
EasySMX Wireless Games Controllers Review - 25th Mar 19
Stock Market Short-term Top - 25th Mar 19
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Can the Underground Economy Save Europe?

Economics / Euro-Zone Nov 23, 2011 - 12:28 PM GMT

By: David_Howden

Economics

Best Financial Markets Analysis ArticleAs the old saying goes, the more expensive you are to fire, the more expensive you are to hire. Nowhere is this more apparent than on the European continent.

Even with the United States' lengthening of unemployment insurance benefits at the wake of this crisis, the benefits for the standard down-on-his-luck American pale in comparison to those of the average European. Upon job separation the average Frenchman can expect to see more than half of his salary extended in the form of unemployment benefits. Many European workers see these benefits extended for two to three years after their termination, with some countries extending benefits indefinitely.


Spells of unemployment are consequently prolonged on the European continent. Strict laws governing the separation of employees from companies (a nice way to say, "You're fired") lower the rate of job separation in these countries. Unfortunately, these laws also decrease the rate of job finding, resulting in the prolonged unemployment durations evident.

This problem of unemployed masses was no more than an unfortunate consequence of a well-developed social-welfare system during the boom years. Government coffers were plush to pay out hefty benefits. As the crisis wears on, this unfortunate side effect is increasingly turning into an oncoming train wreck as government deficits widen and welfare payments strain already tenuous state finances.

Decreasing benefits may be unfortunate to those relying on them, but such cuts are inevitable. Already some countries have enacted measures to try to bring these unsustainable systems closer to sustainability. The retirement age has been extended to reduce social-security payments, and unemployment benefits have been cut. People have responded with protests, trying to maintain the standard of living that they fought so hard to achieve over the past decades. Unfortunately, not all things desirable are feasible — Europe's plush welfare system is a case in point.

Fortunately there is a silver lining. In most European countries, and especially in the crisis-stricken periphery, large underground economies exist. While Spain's official unemployment rate is pegged around 20 percent, a substantial portion of its workers are indeed employed, if only outside official statistics. As I outline in a new collection I've edited, Institutions in Crisis: European Perspectives on the Recession, the underground economies of Europe's periphery provide ample (if not always desirable) opportunities for employment. While the Greek economy has the largest underground estimated at 25.2 percent of GDP, the PIGS countries (Portugal, Italy, Greece, and Spain) average 21.7 percent of their economic activity hidden from the official statistics. For comparison, 14.7 percent of German, and 7.8 percent of American output is estimated to be confined to the underground.

If substantial masses of officially unemployed workers can take solace in knowing that there exist large underground venues for their efforts, we may do well to outline the reasons why this unofficial option exists. Hans Sennholz, in his work The Underground Economy, lists four main categories of underground economy activity:

  1. that portion evading taxes,
  2. that portion violating laws or production standards,
  3. production from transfer beneficiaries barred from otherwise partaking in pecuniary-enhancing activities (welfare recipients for example), and
  4. production from illegal aliens.

While many people assume that the underground economy consists purely of tax evaders and drug dealers, we see that only two of the categories above allow for these groups. That is not to say that underground workers in the other categories do not evade taxes or sell elicit substances. It is to say that the main reason for their involvement outside of the official economy is neither of those reasons.

Europe's underground economies have seen much growth over the past 30 years, especially since this crisis began. In some ways the growth of unofficial employment is an entrepreneurial response to unnecessarily rigid labor markets and excess regulation. Evidence suggests that industry in at least two of our prime culprits have benefited from the expansion of the underground economy. Growing underground economy employment has allowed Italian and Spanish firms to expand and contract production more easily to market demands.

There is an increased emphasis on reallocating the underground economy into the official one as Europe's crisis progresses. The most commonly advocated method involves more frequent tax audits and heavier fines to incentivize entrepreneurs to report their full incomes to the official authorities. The problem with such a solution is that it ignores the core reason why the underground economy exists — and may very well strengthen its existence.

Entrepreneurs operate in the unofficial economy for two main reasons: taxes make official transactions unprofitable, or regulations make them unfeasible. Threats of increased monetary fines do nothing to alleviate the former reason, while only a reduction in the web of rules and regulations will reduce the latter.

Increased fines and audits will undoubtedly reduce the size of the underground economy. Entrepreneurs, even underground ones, will respond to the increased costs and risks by reducing the scope of their activities. This reduction will not translate into an increase in official market activity. Only by easing the regulatory and tax burden facing entrepreneurs will more of them be willing to operate in the official economy.

Instead of viewing Europe's underground economies as bad things, policy makers would do well to start viewing them for what they are: an important signal that old interventionist policies have failed. If one views large underground economies as inherently bad, one must also deem the policies that breed their existence to be bad.

David Howden is a PhD candidate at the Universidad Rey Juan Carlos, in Madrid, and winner of the Mises Institute's Douglas E. French Prize. Send him mail. See his article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules