The shadow economy is alive and well in America today. This form of doing business has been around for as long as people have been depending on one another for products or services that they can not provide for themselves.
Goods and services changing hands without benefit of licenses or taxes paid is commonly referred to as the shadow economy. Credit is not used in these transactions, cash is the going currency. Probably the largest shadow economy that comes to mind when hearing this definition is the drug trade. This is one example, but by no means the only one.
If you have ever watched a neighbors children one night in exchange for them watching yours the following week, you’ve participated in the shadow economy. In this situation, no one has a childcare license, and no money changes hands.
The common yard sale is another example, a person is selling goods for cash. That person has not paid taxes in the form of licensing fees, and chances are that they will not keep strict records in order to pay income taxes.
Farmers markets and roadside stands are another example of how prevalent the shadow economy is in this country. The grower pays taxes on the income they gain when selling in bulk to distributors, they are after all paid with a check. When selling directly to you the consumer at a stall, the payment is in cash, and chances are no income taxes will be paid.
Many entrepreneurs find it difficult, if not impossible to build a business when faced with regulations, start-up expenses, and governmental red tape. When just starting out these business people find that simply selling their goods without the benefit of jumping through all the required hoops allows them more freedom to test their market, and to be creative. If a product fails to sell, they simply stop selling it without having to declare bankruptcy and start a new business from scratch.
When the current economy of a country fails to meet the needs of it’s consumers, shadow economies are one way people can still purchase what they need at a price they can afford. Governments are unable to track down every single transaction that takes place in order to levy the traditional taxes, and these economies thrive.
In developing countries, the shadow, or unofficial economy, is vitally important as it allows business to take place without the influence of corrupt officials. The producer feels they are receiving a fair price for their product, the consumer is happy with the price. The transaction is completed without adding to the wealth of officials who regulate prices and taxes in the governmentally regulated economy.
Despite it’s negative connotations, the shadow economy can be a complement to the official economy. Producers, and consumers come to an agreement on price without outside influences, and entrepreneurs are encouraged.