Monday, April 14, 2008

What is missing, as it is from all Labor Department Statistics -- and from what I can ascertain from all Academic Economic Studies -- is a reliable estimate of the Gray Market -- the cash and barter economy into which people move regularly and without reporting.

It exists for many reasons, two of which are as follows.

First, cash wages escape detection by agencies which manage welfare payments, thuis creating dual sources of income for families that qualify for welfare.

Second, the most regressive tax on income at the bottom of the wage scale is that of withholding, FICA and medicare taxes. Bargains are struck with employers to receive cash wages instead. The employer then need not pay his share of the above and FUTA. To do this economically, the employer than under reports sales, pays cash to his wholesaler, etc.

The net effect is to lower reported GDP to a point well below Real GDP. Only gross estimates can be made by economists as to the total effect, but it is likely to be in the double digits.

The legal minimum wage serves as a benchmark for the true minimum wage -- the one actually being paid to the lowest wage earners, which is set in the cash market by the supply of and demand for labor. Is it above or below the legal minimum wage? I would suggest that it is probably a close approximation, perhaps lower in cases where welfare augmentation (see above) occurs, higher where the employee is an independent actor.

Assaying the Gray Market based on changes in the minimum wage might be possible. We surmise that as the legal minimum wage rises, so do the number of jobs which are paid by cash wages. This might be detectable from Labor market statistics.

But the real problem for policy makers is determining what the Real as opposed to the Reported GDP is. That can only be done by minimizing the size of the Gray Market.

One approach (and it would be sound anti recessionary policy on its own) would be to eliminate for employees all offsetting FICA and Medicare deductions, leaving the employer on the hook to pay his share. Raise also the income tax payment threshold to ensure that minimum wage employes have no such liability.

This would incentivize workers to stay in the open market and observe the proper payment of FICA, etc by the employer. In spite of all the uncertainty regarding the future of social security, the employee would be able to see that he was being provided for.



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