The Underground Economy
“Underground” economic activity takes different forms and includes the production/provision of both legal and illegal goods and services. The underground economy (UE) is a concern for governments because it reduces the tax base and can weaken regulatory regimes intended to protect consumers, workers and the environment.
Highlights
“Underground” economic activity takes different forms and includes the production/provision of both legal and illegal goods and services. The underground economy (UE) is a concern for governments because it reduces the tax base and can weaken regulatory regimes intended to protect consumers, workers and the environment.
Published global estimates suggest that the UE amounts to between and 8-30% of GDP among the advanced economies, with Canada closer to the lower end of the range.
Estimates of the size of the UE produced by Canadian researchers vary widely, ranging from just 2.3% of GDP to over 15%, depending on the author, the definition, and the research methodology used.
Studies from Statistics Canada over the past two decades find the UE equal to 2.3% to 5.2% of GDP. These studies do not capture many kinds of illegal transactions and also miss some legal but “hidden” activities involving households and unincorporated businesses.
Based on broad definitions, the current size of the UE in Canada may fall in the range of 5-8% of GDP.
We believe that unobserved, unreported and untaxed economic activity is more prevalent in British Columbia than in the country as a whole, for three main reasons. First, the private sector in BC is heavily weighted toward small unincorporated businesses and the self-employed, where underground activity is more common. Second, the construction industry – the industry that’s most prone to “hidden” activity – is proportionately larger in BC than in other provinces. Finally, BC has a large and thriving illegal drug industry that generates several billion dollars of cash-based transactions every year and serves to increase the size of the UE.
Add it all up, and it would not be surprising if the overall UE in British Columbia is equivalent to 10% or more of the province’s reported GDP.