We want to buy more when we don’t pay the tax on goods. Similarly, employers want to employ more workers when they don’t have to pay a tax on labour
There is a stigma attached to the productive activity commonly called employment “off the books” or “under the table”. This is the case in which the employer and the employee hide their relationship from the state and thus avoid being forced to pay levies to the state or comply with state regulations. The stigma attached to employment “off the books” is unfortunate for at least two interrelated reasons. First, this stigma is based on widespread misconceptions about the nature of the productive relationship between the employer and the employee. Second, the misconceptions about the nature of employment “off the books” facilitate policies that end up harming those same people these policies were designed to help—the poorest members of society. I will address the most common five of these misconceptions I have encountered so far.
1. If workers refuse to work “off the books”, the employer will have no choice but to hire them legally.
There is economic theory behind work “off the books”, and it is clear that many of those who advocate condemnation and punishment of this type of productive activity don’t understand this theory. I too worked “off the books” as a new immigrant in Canada, and I did this because this was the only way for me to be profitable to the employer. In other words, my contribution to the profit of the company was not large enough to pay for the government-required fees and regulations. If my employer had to pay all the fees and comply with all the regulations, he would have been better off not employing me at all. Employing me under those conditions would have been a waste of money for him. Many people who work “off the books”, like I did in my first years in Canada, would not have been offered their present job if they demanded to be employed legally. In many cases, working “off the books” is the best option not only for the workers and employers but also for other members of society. If a person were to be prevented from working “off the books” and ended up being unemployed, other citizens (i.e., tax-payers) would have to provide him with the goods and services necessary for living. The unemployed person would, however, not provide anything in return. In contrast, by remaining employed “off the books” he would keep providing a productive service to others.
2. Working “off the books” is unlawful and therefore it should be strongly condemned and severely punished.
The fact that something is illegal does not mean that it is in itself bad or immoral. I often use the example of keeping black cats in one’s home during the Middle Ages to illustrate this point. Raising black cats in the Middle Ages was illegal, but now we see how absurd and arbitrary this law was.
Suppose that the state parliament votes on a new law that requires every employer to increase his contribution to the state budget by 25% per every employee. At the moment the new law is introduced, all those who are employed under the old law become criminals, and, according to the new law, they should be condemned and punished. But, the only difference between how they do their business now and how they did it before is that some people (i.e., 250 or so members of parliament) don’t like it any more. These members of parliament want more money now, and if you don’t give this money to the state, you will be labeled as a criminal.
To avoid being labeled as criminals, some employers would have to lay off the least productive workers. Alternatively, the employers could keep these workers off the books. Working “off the books” is the way the the employer and the employee try to avoid state levies and thus maintain their productive relationship. The magnitude of the state levies is always a result of arbitrary decisions of those in power.
3. Hiring “off the books” always gives an employer extra profit and therefore always represents the exploitation of the poor by the rich.
This statement is problematic for two reasons. First, let us note that hiring “off the books” gives employers “extra profit” only in the case of those workers whose marginal value products (i.e., their contribution to firm’s profit) is significantly higher than their current salary. For all others, hiring “off the books” provides employers with just enough profit to keep the marginal workers (i.e., workers whose marginal value product is only slightly higher than their salaries) in their jobs. If these workers were to be employed legally, they would become too expensive for the employer and he would have to find a way to terminate their employment.
Second, even in the case of those more productive employees, whose marginal value product is significantly higher than their salary, it is problematic to say that they are being exploited by the employer. These employees are in a voluntary relationship with the employer. As long as the employer is not using a threat of physical violence to keep them on the job, there is no objective basis for claiming this is an exploitative relationship. We may not like the conditions of this relationship, and we may want the employee to be paid more, but this is nothing more than one subjective judgement, one of millions of equally subjective judgements of other people. How are we to persuade someone that our judgement is more correct than any other judgement? We can’t. Other than the absence of physical invasion and a threat of force, there is no objective criterion against which we could measure the “exploitative” nature of any relationship.
4. Employment “off the books” destroys the competition by firms that are doing business legally.
It is not employment “off the books” that destroys competition. It is the regulations. Why? Suppose an employer decides not to hire a worker “off the books” because he does not want to “cheat the state.” If this worker is not profitable when hired legally by this employer, then he will not be profitable if hired legally by another, similar employer. The employee will become unemployed and either turn to the welfare office or become a burden to his family and friends. So, by refusing to hire workers “off the books” the employer did not help someone who would want to hire the same workers legally. He has just added another person to the number of those that are already living at the expense of the tax payers.
5. Our country is poor because employment “off the books” does not contribute to the state budget.
This is a statement that can often be heard in the so called developing countries. People somehow perceive illegal, yet voluntary and peaceful labor to be the cause of the relatively low level of well being in the country.
In fact, the true causal relationship runs in the opposite direction. Employment “off the books” is common in poor countries precisely because regulatory compliance is costly. Each new regulation requires a pre-existing stock of goods that will be spent on compliance activities. Regulations require producers to perform additional activates that they did not perform before. These activities require time and other resources. Without an increase in productivity, new regulations cause a reduction in the available stock of goods and services. In other words, regulations deplete our wealth. Thus, compliance with various state regulations is a luxury that only rich economies can afford.
Contrary to the common belief, it is not employment “off the books” that impoverishes a nation; it is compliance with the ever increasing number of arbitrary demands by the state that impoverishes many productive individuals. Employment “off the books” is the last ditch attempt by these individuals to escape this impoverishment and thus remain productive members of society.
Conclusion
Working “off the books” is a special kind of productive activity. It is special not for its alleged immoral character but for its unique economic features. It is one of those activities that keep the poorest and the least productive members of society from getting even poorer by becoming unemployed. This productive activity also saves the rest of society from becoming the sole provider of living expenses for these unfortunate individuals. Thus, those who want to help the poor ought to advocate for decriminalizing the poor’s secretive, “off the books” relationship with their employers, not threaten them with fees, fines, imprisonment or other forms of state force.