The Breakdown | Explaining Southern California's economy

California's underground economy: The cost of doing business in the state

Cleaning services are vulnerable to the underground economy and price competition.
Cleaning services are vulnerable to the underground economy and price competition.

How much does the "underground economy" cost California every year in lost tax revenue? A whopping $7 billion, according to LA Times

A recent review of records from nearly 1,500 employers revealed that nearly a third lacked legally required workers' compensation insurance coverage to pay the medical bills of employees hurt on the job, Baker said.

Many of those workers seek treatment at hospital emergency rooms, a burden that ultimately falls on insured patients and taxpayers. They also seek benefits from state workers' compensation courts and money that comes from a special state fund that passes the costs along to law-abiding employers. Off-the-books laborers likewise don't pay income taxes, while their employers avoid payroll taxes to fund unemployment insurance benefits.

Bottom line: Tax-paying companies, consumers and taxpayers are stuck paying the bill for cheats.

So what's driving all these off-the-books cash payments? Simple: price competition. And the miserable economy. But if you think about it, you can see the opportunity here. In many respects, it's a classic example of something I've written about before, "disruptive innovation," although in this case the innovation part is really more about undercutting the legal system. 

Of course, understanding just how much you can get away with before the cops bust can be as innovative as dreaming up the next iPhone app. It's just not sanctioned by a society of laws. The pattern is similar, however. Businesses don't want to sacrifice on the basic services they require — cleaning is a good example that the LAT points to — but they can't cover the cost of providers who work on the up-and-and. So they allow a cheaper provider to get in on the action. 

Actually, it might be more accurate to call this "disruptive opportunism" rather than innovation. An innovator usually brings a better mousetrap to market and makes that a selling point. But the "cheats," as the LA defines them, are really just taking a crisis and spinning it into gold, while keeping their own costs illegally low. 

I know this sounds awful, but it's a process that's been going on for centuries. Usually, the economic crisis passes and the status quo — which is after all better for workers, employers, and that state — reasserts itself. 

But this time around, the crisis has been so severe that the status quo has had to give way to survival mode. And that's when the way we want things to be and the way they really are can change how companies do business forever.

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