More Workers Turning to ‘Informal Economy’ to Make Ends Meet, According to Ludwig Institute

Women, young and Black workers most likely to turn to ‘off-the-books’ income sources

October 29, 2024

For Immediate Release

WASHINGTON, D.C. — A growing number of Americans turned to “off-the-books” work in 2023, according to a new study by the Ludwig Institute for Shared Economic Prosperity (LISEP). However, findings revealed these supplemental forms of income were largely ineffective in lifting low-income workers above poverty-level wages.

“Our research shows that individuals most likely to turn to the informal economy are those who have been unable to secure stable, well-paying positions in the formal market,” said LISEP Chairman Gene Ludwig. “Contrary to popular belief, however, informal work is no panacea for those struggling to find living wage jobs."

According to LISEP’s research, 1.4 million Americans reported working informally for pay on an average day in 2023—the highest level since 2016. While this represents a considerable increase in the daily average from the last three years (1.14 million), the informal economy was less effective in helping low-income earners achieve functional employment—defined as earning above poverty wages ($25,000 a year in 2024 dollars) after adjusting for inflation and working full-time hours, if desired. Despite low levels of unemployment in the formal labor market,15.9% of informal workers were unemployed job seekers in 2023, compared to 2.2% of the overall population.

Using LISEP’s True Rate of Unemployment Out of the Population (TRU OOP) metric—which measures the functional unemployment rate of the entire working-age population (16+)—incorporating informal earnings would have reduced the functional unemployment rate by only 0.8 percentage points at most, from 51.9% to 51.1%. By comparison, incorporating informal earnings would have reduced TRU OOP by 1.3 percentage points in 2022 and an average 1.2 percentage points lower from 2003 to 2022.

Women, young, and Black workers continue to be disproportionately represented in the informal economy. In 2023, nearly twice as many women as men reported working informally. Among workers aged 16-24, 640,000 reported working informally in 2023, the highest level since 2008. And over the last three years, 53 out of every 10,000 Black workers reported working informally on an average day, compared to 42 White workers and 45 Hispanic workers.

“The perception that middle- and low-income Americans are financially better off than headline statistics suggest due to unreported one-off and side jobs is nothing more than a myth,” Ludwig said. “Policymakers must recognize this reality to develop effective solutions.”

More Workers Turning to ‘Informal Economy’ to Make Ends Meet, According to Ludwig Institute

Women, young and Black workers most likely to turn to ‘off-the-books’ income sources

‍Jim Gardner

October 29, 2024

For Immediate Release

Additional Resources

Historically, systemic barriers have disproportionately hampered Black farmers’ ability to retain land ownership.

Despite this tragic history, there is still time and economic incentive to set some of the inequities right.

In 2021, working mothers with children under 18 earned just 61.7 cents for every dollar a father made. Much wider than the overall gender wage gap, this difference highlights both the motherhood penalty and the fatherhood premium.

Female-dominated, low-paying, part-time occupations are overrepresented among informal workers who also have a formal job.

We need to create an economic environment where companies can hire these workers as employees and pay them a living wage. There are steps policymakers can take to change the gig economy dynamic.

Dependency on tips over base pay is growing because of actions taken by gig companies to institute tipping.

Even for those lucky enough to be making what amounts in many states to the poverty wage of $15 per hour, many will get nothing but a week’s notice before being out on the street.

One study shows that consistent involvement in extracurricular activities increased a child’s likelihood of attending college by a whopping 400% compared to not being involved at all.

Studies have found that both men and women are paid less if they work in “nurturant” occupations.

Since 2015, the correlation between LISEP’s functional employment to population ratio and the inflation rate was more than four times as strong as the BLS’s employment to population ratio, which is depicted in the graph below.

The employment to population ratio settles the discrepancy between what we see around us and what the data says.

The NBER paper defines employment using the traditional BLS U-3 rate. However, the often-used U-3 number fails to capture the quality of jobs.

Among states with stricter COVID-19 policies, reducing unemployment benefits had little to no effect. The average effect of increased employment seems to have occurred only in those states with looser COVID protocols.

Press Contact:

‍Jim Gardner

press@lisep.org

(573) 680-1822

Additional Resources:

Informal Economy Summary

Informal Economy White Paper

Informal Economy Methodology

Informal Economy Source Data

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 .

About LISEP

The Ludwig Institute for Shared Economic Prosperity (LISEP) was created in 2019 by Gene 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. On X: @LISEP_org.

About Gene Ludwig

In addition to his role as LISEP chair, Gene Ludwig is founder of the Promontory family of companies and 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 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.