'Informal Economy' of No Help to Low-Wage Earners, LISEP Study Shows

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Ludwig Institute for Shared Economic Prosperity

Nov 29, 2023, 10:21 ET

'Off-the-books' income doesn't compensate for bad jobs

WASHINGTON, Nov. 29, 2023 /PRNewswire/ -- Even when accounting for unreported income, more than one-in-five American workers are still unable to find employment or generate income lifting them above the poverty line, according to a new study by the Ludwig Institute for Shared Economic Prosperity (LISEP).

Today LISEP issued a new report, "The Hidden Workforce: The Impact of the Informal Economy on Functional Employment," a study to supplement its monthly True Rate of Unemployment report (TRU). TRU measures the "functionally unemployed," defined as the jobless plus those seeking, but unable to find, full-time employment paying above the poverty line. For October, LISEP reported a TRU of 22.7%.

The informal economy study sought to dig deeper into the living-wage employment picture by including income typically unreported, such as side jobs, income generated from hobbies, and other "off-the-books" work. The study measured informal work through the lens of the TRU to determine the extent to which gig work or one-off jobs bridge the gap to functional employment. LISEP found this stream of income, while a welcome supplement among lower-income wage earners, does little to move them over the poverty line. On average, factoring in informal income reduces overall functional unemployment by only 1.1 percentage points.

"The widespread misconception that side hustles and other 'off-the-books' income is vastly improving the financial condition of the working- and middle classes simply is not true," said LISEP Chair Gene Ludwig. "At best, it improves their conditions slightly but leaves them under the umbrella of poverty earnings."

Ludwig noted informal workers often earn low wages and are not covered by workplace protections set in place for formal jobs — potentially leading to their exploitation by employers.

LISEP's study also revealed low-income individuals are more likely to engage in informal employment, with workers in low-paying occupations — such as personal care, service workers, and unemployed jobseekers overrepresented in the informal sector. Women, Black and Hispanic populations, who are more likely to be functionally unemployed, make up a disproportionately large share of informal workers.

"What we are seeing is the informal economy does not offset poor paying jobs. More appropriately, it's merely some thin padding for a very bumpy ride," Ludwig said. "The perception that middle- and lower-income workers are thriving in a shadow economy is nothing more than a myth."

About The Informal Economy
LISEP issued the white paper "The Hidden Workforce: The Impact of the Informal Economy on Functional Employment" as part of its ongoing analysis of the functionally unemployed, defined as workers who are jobless, plus those seeking, but unable to find, full-time employment paying above the poverty line. LISEP's measure of the functionally unemployed, the True Rate of Unemployment (TRU), is tracked monthly on the LISEP website at https://www.lisep.org/tru.

About LISEP
The Ludwig Institute for Shared Economic Prosperity (LISEP) was created in 2019 by Ludwig and his wife, Dr. Carol Ludwig. The mission of LISEP is to improve the economic well-being of middle- and lower-income Americans through research and education. LISEP's original economic research includes new indicators for unemployment, earnings, and cost of living. These metrics aim to provide policymakers and the public with a more transparent view of the economic situation of all Americans, particularly low- and middle-income households, compared with misleading headline statistics.

About Gene Ludwig
In addition to his role as LISEP chair, Gene Ludwig is a managing partner of Canapi LLC, a financial technology venture fund. He is the founder and CEO of Ludwig Advisors, which counsels financial firms on critical matters. Ludwig is also the founder of the Promontory family of companies. He is the former vice chairman and senior control officer of Bankers Trust New York Corp. and served as the U.S. Comptroller of the Currency from 1993 to 1998. He is also author of the book The Vanishing American Dream, which investigates the economic challenges facing low- and middle-income Americans. On Twitter: @geneludwig.

SOURCE Ludwig Institute for Shared Economic Prosperity