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Understanding the American cash economy

Updated on August 4, 2015

What is the cash economy

Stated simply the cash economy is the unrecorded part of the economy of any nation. These are the small businesses that don't play by the same set of rules as everyone else. A lot of them will pay workers in cash, so then they are able to get workers for less, and they don't have to pay for items like payroll taxes, unemployment insurance, and workmen's compensation. These payments can easily add 20 percent to your payroll costs.

The largest areas where you will find these cash businesses are in construction, small retail, flea markets, and others that make use of independent contractors. these groups of people are on disability, and other government programs, and make extra money working in the cash economy. They are paid in cash, and only used when needed. Also they are not paid overtime or paid vacations because they work outside the normal regulated economy.

A large number of the workers in the cash economy, also get food stamps and receive healthcare from medicaid. This means the federal government is helping to take care of some of the basic needs of these workers for businessmen in the cash economy. At the same time these workers are making cash money, which they spend in the retail economy. This bolsters the overall economy of the United States. If it wasn't for the cash economy, the government would have to spend much more in support of people who aren't working a regular job. So there are benefits from the cash economy, for the economy as a whole.

Another benefit enjoyed by our retail economy, is the fact that they are selling like we have an unemployment rate of about 5.5%, even though the actual unemployment rate is about 7.6%. The difference is because of the cash economy. The biggest problem with the cash economy is that our federal tax system is not set up to collect tax revenue from them. Therefore the federal government can't supply some needed services for the rest of us. When they try they have to borrow money to supply these needed services.

The cash economy currently is about two trillion dollars, in the United States. This means the federal government is losing up to $500 billion yearly in lost tax revenue, using our current tax system. The states also lose tax revenue, however not as much as the federal government. We will now take a look at some of the causes of the cash economy.

an inbalance between labor and capital

The imbalance between labor and capital

There is this imbalance in the United States today, because of the globalization of our labor supply, there is too big a supply of physical labor chasing a limited supply of capital. This gives the owners of capital an advantage, and makes a lot of people around the world economic slaves. The owners of capital use production advances and a global labor supply, to make economic slaves out of part of the global labor supply.

This was done on plantations in the south prior to the civil war. It gave our economy a big economic advantage in exports, however it perpetuated slavery in the southern United States. This imbalance between labor and capital is starting to have the same effect once again. It is forcing workers around the globe into economic slavery. Whenever any group overly exploits labor, it causes economic slavery. There are groups of workers in the United States, that make way less than the minimum wage. A lot of it is brought on by the use of the large global labor supply. Now we will take a look at how training affects this labor capital conflict.

How bad training affects workers

How bad training affects the American worker

The American system of production is very advanced compared to some parts of the world. Therefore the average American worker needs to be trained quite a bit better than the average worker worldwide. This is the only sensible reason to pay our workers more than the cheapest labor worldwide.

In 2010, the median earnings of workers with a bachelor's degree, was forty five thousand dollars per year, while the median earnings of a high school dropout was twenty one thousand per year. In spite of this, each year 1.3 million students drop out of high school in the United States. The jobs that a person with a minimum education can get, are rapidly disappearing, in this country. Productivity increases are getting rid of a lot of them and those that are left are being shipped overseas, whenever possible, to low wage countries. These people can do these jobs as well or better than the average dropout. To have the ability to survive as a worker in the future America, you will have to undergo periods of training, throughout your working life. If you don't do this, you can expect sporadic employment, throughout your entire working life. Either that or you will become a part of the cash economy. The next thing to look at is how recessions affect the shadow economy.

The shadow economy

How recessions affect the shadow economy

Every time we have a recession, there are large layoffs and the group that suffers the most are the worst educated. They are usually the first laid off and they suffer the longest period of unemployment. A lot of them get jobs in the cash economy and then some of them never return to the regular economy. Others work in the regular economy, during good times and in the cash economy, when they can't find a regular job.

Some of the problems are that they don't pay income or payroll taxes, when they work in the cash economy. This causes tax revenue shortages, since the federal government gets the vast majority of their revenue, from personal income taxes and payroll taxes. This cash pay not only hurts the federal government, but also the worker, who doesn't build up enough retirement credits and only receives the minimum amount of retirement benefits. This retiree then becomes a drag on society, because of limited income and because of receiving benefits from the government to survive.


There are good and bad things associated with the cash economy. It does supply work to some workers, who wouldn't have employment otherwise. It also supplies demand to the retail economy, that wouldn't be there otherwise. The bad thing is that the government doesn't collect the tax revenue it should, from the cash economy. This means that the government has to borrow more money than it would under ordinary circumstances. We need to figure out how, to make up that loss of revenue. This is what I will explain in the next article on the cash economy.


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