The subterranean economy, in a nutshell, is non-reported work which means non-reported wages meaning zero tax revenue for state. The subterranean economy is as simple as the neighborhood kid mowing lawns for cash and as sophisticated as organized crime. Keep the subterranean economy in mind for a moment.
Within the study of labor economics is the phenomena of the discouraged worker. The discouraged worker is basically that worker that has given up looking for employment as they feel its fruitless given current employment opportunities. These same discouraged workers are attracted back into the labor force due to improving headline unemployment numbers. Hence discouraged workers can make a headline unemployment rate [unemployment measurement u3] look better than it actually is by leaving the work force and hence the total work force shrinks yet employed remains constant giving the phenomena of the unemployed number shrinking. Conversely, when the discouraged worker is attracted back to the labor force the unemployment rate flattens then increases as a flood of discouraged workers perceive employment opportunity therefore the work force expands In the short run, this expanded work force is not immediately employed hence headline unemployment rises.
Therefore labor participation rates change at the margin depending on how many discouraged workers enter or leave the work force. Today the labor participation rate is historically low. What if the decrease in labor participation rates is merely an indicator of an increase in labor participation rates within the subterranean economy?
Would the failure of, or speed by which the discouraged worker is attracted back to the labor force be a function of and/or an indicator that the “labor” is in fact engaged, albeit in the subterranean economy?
Many people consider the subterranean economy as some abstract and singularly organized crime type of underworld. Nay, nay. The subterranean economy is real and comes in many forms and many levels within those forms. That is to say, it’s a real economy with real dynamics. Further, much like the phenomena of welfare, leaving subterranean employment and entering the surface economy comes with a disincentive in the form of wages after tax (as in welfare, wages in the subterranean economy may exceed employment available in the surface economy, the wages thereof, wages that after tax are below the subterranean economy non-taxed wage, hence rationally staying in the subterranean, as in rationally stay on welfare becomes the choice when the person weighs total revenue after tax: subterranean wage or welfare receipt vs. taxable employed wage after tax).
If one sees a statistical failure of the discouraged worker to be attracted back to the labor force, would that be an indicator that the “labor” is in fact engaged albeit in the subterranean economy? If in fact labor is pervasively engaged in the subterranean economy, one would expect to have some level of rigidity at the margin regarding reentering the labor force and leaving a subterranean wage position (wage rationality mentioned above). Finally, if the subterranean wage position is vacated, and given the current army of discouraged workers numbering in the millions, does another discouraged worker merely fill the vacated subterranean position before entering the surface economy labor force (like a halfway house on the way to the surface economy participation) hence the population of the group "discouraged worker" falls slower than one would otherwise anticipate?
(1)Measuring the Non-Observed Economy. http://www.oecd.org/dataoecd/9/20/1963116.pdf
(2)The "underground economy"and BLS statistical
(3) What is the Labor Force Participation Rate? http://economics.about.com/od/unemploymentrate/f/labor_force.htm
(4) Santelli: 1.2 Million Fall Out Of Labor Force As Participation Rate Hits 20-Year Low, Real Clear Politics. http://www.realclearpolitics.com/video/2012/02/03/santelli_12_million_fall_out_of_labor_force_as_participation_rate_hits_20-year_low.html