The 'underground economy', immigration and economic development in the European Union: an agnostic-skeptic perspective.

AuthorSamers, Michael E.
PositionReport

Abstract

Is the underground (or informal) economy growing in European countries and to what extent is it related to (illegal) immigration? This paper draws on research primarily from the experiences of European Union countries since the early 1990s, and critically analyses the relationship between the apparent growth of (illegal) immigration, n forms of political economy, and what shall be referred to in this paper as 'underground employment'. By disentangling these complex processes, I provide afire-grained critical assessment of some of the more hyperbolic statements about the growth of underground employment, especially with respect in (illegal) immigration. That is, without denying the presence of underground employment, or the role of immigration within it, my discussion ranges from the agnostic to the skeptical. 1 conclude by suggesting what implications my analysis has for economic development policies with respect to underground employment in European countries.

  1. INTRODUCTION

    In early January 2005, the putatively left-leaning British daily, The Guardian, published yet another expose on 'illegal workers' in the UK. To anyone working in the field of immigration or employment in Europe (or anywhere else for that matter) this could hardly be labeled 'news', worrying or depressing, as it may have seemed to some. Indeed, for most critical political economists, it is no longer novel to critique the assumption that the world's economies are on some ineluctable path to 'modernization' and 'formalization'. Most of us can accept this without too much scholarly protest. What chimes as more suspect is the consensus among academics, governments, and the popular press that the 'underground economy' has been growing over the last three decades across the 'post-industrial' economies. In fact, it may come as a surprise that as early as the late 1970s, O'Higgins (1980) believed that the 'hidden economy' had peaked in the UK, for example, because of the lack of cash required to redistribute work (Pahl and Wallace, 1985).

    While these same observers cite a range of reasons for this growth, they also persistently attach causality (to not use the word blame) to an apparent increase in ('illegal')' immigration. In this respect, nearly two decades ago, Castells and Portes (1989) questioned the widespread assumption that directly linked the growth of underground activity to an increase in immigration. As they put it:

    "... European case studies contradict the view that the underground economy is primarily a consequence of immigration [..]..Undoubtedly, immigrants provide one source of labor for the expansion of these activities, and they may be preferable to domestic workers because of their vulnerability. However, the underlying causes for the expansion of an informal economy in the advanced countries go well beyond the availability of a tractable foreign labor supply." (p. 25).

    More recently, other observers provide evidence from national case studies which support Castells and Portes' conclusions, and argue similarly that (illegal) immigration (to the extent that it is increasing) may facilitate, but does not create underground activity (Quassoli, 1998; Reyneri, 1998; Sassen, 1996, 1998; Wilpert, 1998). Indeed, it is commonly argued that citizens, rather than immigrants, perform the bulk of underground activity, even if the majority of immigrants are involved in underground activity (Williams and Windebank, 1998). In any case, we need to move beyond the verb 'facilitate' however, to elaborate on the precise processes involved, if only because some authors ardently dismiss the availability of an immigrant labor force as a causal explanation, while nonetheless slipping occasionally into such reasoning (compare Sassen, 1991, 1996, and 1998 for example).

    In this sense, this paper draws on research primarily from the experiences of European Union countries since the early 1990s, and critically analyses the relationship between the apparent growth of (illegal) immigration, new forms of political economy, and what I shall call 'underground employment'. By disentangling these complex processes, I provide a fine-grained, critical assessment of some of the more hyperbolic statements about the growth of underground employment, especially with respect to (illegal) immigration. That is, without denying the presence of underground employment, or the role of immigration within it, my discussion ranges from the agnostic to the skeptical. I conclude by suggesting what implications my analysis has for economic development policies with respect to underground employment in European countries.

  2. WHAT ARE UNDERGROUND ECONOMIES?

    There is no unitary 'underground economy', and what might be considered the underground economy is actually a diverse mixture of economic practices that belie a singular definition. Indeed, rather than attach a noun such as 'economy' or 'sector' to these practices (Williams and Windebank, 1998), what we call the 'underground' or 'informal' economy might be better thought of as a process that Sassen (1998) prefers to call informalization.' This implies that what is deemed 'underground' or 'informal' shifts with the contours of regulation. Nonetheless, it is possible to draw loose distinctions between different kinds of activity and to arrive at a working definition that will allow us to critically examine the relationship between the 'underground economy' and immigration.

    Echoing Castells and Portes (1989), Williams and Windebank define the 'informal sphere' as "all productive' or work' activities that are hidden from or ignored by the state for tax, social security and/or labour law purposes, but which are legal in all other respects' (1998: 1). Furthermore, Williams and Windebank prefer to distinguish between informal economic activity that is paid (what they call informal employment) and un-paid informal economic activity - what they call un-paid informal work (also referred to as mutual aid). This paper is primarily concerned with the former, that is where a wage transaction is involved, and where the product produced is legal even if the conditions under which it is produced are not. Consistent with the terminology of this symposium issue, I will call this underground employment. I do not consider the relationship between immigration and what might be called illegal employment (that is employment where the product concerned is strictly illegal, such as drug production or prostitution)', even if the two may be intertwined in some instances. In any case, my working definition of 'underground activity' allows us to critically examine its relationship to immigration.

  3. IS UNDERGROUND ACTIVITY GROWING IN EU COUNTRIES? SOME EVIDENCE

    There seems to be an implicit assumption, whether popular or academic, that 'underground economies' are growing (the so-called 'informalization thesis') (see Williams and Windebank, 1998). As Castells and Portes (1989) assert, "What is new in the current context is that the informal sector grows, even in highly institutionalized economies, at the expense of already formalized relationships" (p. 13). In this respect, rather than rely on arguments that rest on convincing theoretical logic (which I discuss further below) or what are called 'direct methods' (which have thus far yielded fruitful and critical insights but not systematic evidence), let us review briefly some of the quantitative evidence from 'indirect methods' of estimation for this apparent growth. (4)

    Schneider and Enste (2000) have produced what is probably the most comprehensive review of the various methods used (including their own) to estimate the size of 'shadow economies'. (5) Their thorough study also allows them to provide one of the most substantial comparisons of results from different indirect approaches that involve time series, instead of static analyses of shadow economies in different countries in disparate years. Nonetheless, let us begin with a static picture of the relative size of shadow economies in different EU countries. Table 1 shows the approximate size of the shadow economy labor force in 7 EU countries, for the EU as a whole, and in comparison with all OECD countries using the so-called 'currency demand approach'.

    Table 1 shows that the size of the shadow economy in these European countries has varied from 5.47% of GDP in Austria in 1991 to 27.3% of GDP in Italy in 1997-8. However, caution is required in interpreting the results from Table I because the 'currency demand approach' is but one method among many, and not without its flaws. (6) In any case, the real value of Schneider and Enste's study is their focus on the results from time-series data, to which I now turn.

    Using the physical input (electricity) method in a selected number of EU countries, namely Austria, Denmark, Germany and Sweden, they calculate that the 'shadow economy' has grown by 6.5%, 13%, 11.2%, and 14% respectively between 1960 and 1995 relative to GNP (2000, 81). Yet they note that "until now there has been no consistent comparison of estimates of the size of shadow economies of various countries, for a fixed period, generated by using similar methods" (2000: 99). And as a consequence, we can also presume that comparative time series data on the growth of shadow economies using similar methods for similar time periods also did not exist until the publication of their survey. Nevertheless, Schneider and Enste compare the findings of studies that use the physical input method, the currency demand approach or the model (MIMIC or multiple-indicators/multiple-causes) approach to estimate the size of shadow economies in 71 countries. Let us focus, however, on EU countries only, and in this case, they rely on results from the first two methods only. That is, they compare findings from a physical input (electricity) analysis in 1990 with the currency demand method of Johnson et al. (1998) for the period 1990-1993, and two of...

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