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Underground Economy Series: Migrant Workers in the U.S.

Some migrant workers in the U.S.

[Editor’s note: Welcome to the Underground Economy series, which delves into the business of illicit, under-the-table, or otherwise accepted-but-not-quite industries. The previous installment explored the illicit drug trade–check it out here. Today’s installment deals with the migrant worker industry!]

When one hears the term underground economy, it triggers thoughts about illegal drug deals and prostitution. But any type of work not reported to the government or taxed applies to such activities. In this regard, migrant workers represent one of the most sizable groups within this shadow economy. In fact, it has been estimated that migrant workers in the U.S. exceed 11 million in number. And for this group, employment rates approach 97%, showing that this labor pool is in high demand. Unfortunately, migrant workers in the underground economy comprise a sizable percentage. This includes both documented and undocumented migrant workers.

Some migrant workers in the U.S. doing some migrant work
Migrant workers in the U.S. make up a decent portion of the underground economy.

Without question, these issues pertaining to migrant workers in the U.S. trigger notable debates regarding immigration policies. Existing policies attempt to enforce immigration laws. But at the same time, they serve to also encourage an increase in migrant workers in the underground economy. Tougher regulatory environments are well recognized as driving forces for illegal employment activities. Likewise, business trends such as outsourcing are also contributing factors as accountability for legal compliance is deferred. Understanding this, it is clear that migrant workers in the underground economy reflect a sizable drain to government tax revenues. And exploring the reasons behind these trends are important in devising solutions.

“The hospitality [sector] was employing a very large number of immigrants [before the pandemic], 30%- 40% of the labor force in that sector was foreign born.” – Giovanni Peri, Director of the Global Migration Center

Economic Impact of Migrant Workers

Out of the estimated 11 million migrant workers in the U.S., the vast majority come from Mexico. In 2019, roughly 41% of undocumented immigrants were from Mexico with other notable nations-of-origin including El Salvador, Guatemala, and India. The earnings of these migrant workers total somewhere around $200 billion annually with nearly $12 billion reported in tax revenues. Notably, this suggests underreporting of income by many undocumented individuals. Experts suspect about half fail to report income and reflect the rough number of migrant workers in the underground economy. Notably, this reflects a sizable loss in collected tax revenues as a result.

When it comes to migrant workers in the U.S., not all industries and sectors are affected equally. Migrant workers in the underground economy and elsewhere tend to work specific jobs. The agricultural and construction industries are two of the largest sectors where migrant workers are hired. These positions reflect manual labor jobs that are otherwise hard to fill. Other industries where migrant workers are commonly found also include the tourism and hospitality sectors. And various manufacturing jobs such as those in automotive plants are also common sites. Because of this, solutions that move migrant workers out of underground economy will affect these companies the most. The economic impacts this could have on specific products and prices cannot be ignored.

“The farm labor crisis is hindering production and contributing to food price inflation. We must address this workforce crisis threatening farms across the United States so our producers can continue to feed, clothe, and fuel our nation.” – Statement by American Farm Bureau Federation

Motivations to Stay Underground

When it comes to the underground economy in general, there are obvious motivations not to report income. The main one simply involves a desire to avoid paying taxes in order to keep more income. But when it comes to migrant workers in the underground economy, other factors are more important. Indeed, most migrant workers in the U.S. earn low wages and could benefit from the added income. At the same time, however, reporting income could place some at risk of deportation or criminal actions. For undocumented immigrants, reporting income could alert officials of their situation. Despite privacy protections with the IRS, many suspect they would be at risk if they filed taxes. This represents a major driver for this segment of the underground economy.

Some migrant workers in the back of a truck
Migrant workers often do the jobs that most don’t want to do, making them essential to the workforce.

This is not the only motivating factor when it comes to migrant workers in the underground economy. Employers can also be encouraged to pay migrant workers under the table. In this regard, they can avoid paying employee benefits, payroll taxes, and other required regulatory payments. This is particularly true during times of economic downturns and higher rates of unemployment. More challenging labor markets and reduced consumer demand can encourage alternative ways to find labor and cut costs. In fact, recent reports revealed that some companies were exploited child immigrants for labor needs. Through outsourcing their staffing needs to other entities, they distanced themselves from their liability. And at the same time, reduced labor costs substantially. Thus, some employers are just as much at fault for the high number of migrant workers in the underground economy.

(Growth through outsourcing is an effective–and essential–business strategy. Read all about it in this Bold story.)

“Our labor shortage and increasing dependence on foreign-born workers is a flash point for abuse.” – Teresa Hendricks, Executive Director of Migrant Legal Aid

Pathways to Legality and Legitimacy

Some migrant workers in the underground economy at work
Migrant workers in the underground economy don’t just work in fields–they also comprise a sizeable number of the manufacturing labor force.

As noted, many migrant workers in the U.S. do report income and pay their taxes. About half of them do so with an individual tax identification number (TIN). This allows undocumented immigrants to file their taxes without an SSN. Many choose to do this for a couple of reasons. For one, it demonstrates good faith to the IRS and government if they are hoping for eventual citizenship. Secondly, it allows access to some social programs that they would otherwise be unable to enjoy. Other migrant workers in the U.S. gain employment through fake documents. When this occurs, employers take tax deductions out of their earnings. While this does not allow the migrant worker to access programs, the revenues do go the IRS.

For the remainder of the undocumented migrant workers in the U.S., taxes are not being collected. In some cases, it would be easy to identify those using fake documents based on employer filing discrepancies. But government agencies including Social Security lack adequate resources to investigate such mismatches. And even the IRS, which has enforcement abilities, often doesn’t pursue investigations either. The penalty for such discrepancies is only $50 per case, which hardly serves as an incentive. Understanding this, it is evident the solution to migrant workers in the underground economy aren’t easy ones. Widespread policy changes are needed along with assurances that labor market needs will be fulfilled. Until that happens, expect a sizable number of migrant workers in the U.S. to stay underground.

 

Companies are laying off lots of employees lately–what should you do to safeguard your future? Read this Bold story to find out!

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