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Sinking Underground

The Growing Informal Economy in California Construction

September 1, 2014 / By Daniel Flaming and Yvonne Yen Liu
Underwriter: United Brotherhood of Carpenters
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Californian Dream Sinks Underground

A New Report Finds One Out of Six Construction Workers in Golden State Employed in Informal Economy Sinking_Underground_img_01 A new report by the Economic Roundtable, a public benefit research organization, released on Labor Day, found that 143,900 construction workers in California fell into the informal economy in 2011. This was comprised of 104,100 construction workers who were not reported by their employers and 39,800 who were misclassified as independent contractors. Construction is a $152 billion industry in the Golden State, employing 895,000 construction workers, of whom one out of six has sunk into the informal economy. A quarter of employees in the specialty trades (including drywall and flooring) were informal. Informal employment in Californian construction has increased by 400 percent since 1972. The ranks of the informal swell with each economic recession, but most recently a larger share of workers have stayed in the informal sector because formal sector jobs have not been recovered. Four years after the end of the Great Recession, the industry has recovered only 66 percent of the jobs lost in the formal sector. ”Safeguarding working people and providing a level playing field for honest employers to prosper is essential for the vitality of California’s economy,” said Julie Su, California Labor Commissioner.  “A just day’s pay for a hard day’s work should be a reality in every workplace.  Information from this report identifying abuses in the construction industry is a valuable tool for protecting workers as well as employers who play by the rules.” The Economic Roundtable estimates that the informal tax gap was over $774 million in 2011.  The federal government lost $301 million in taxes, because of informal construction employment.  California lost a total of $473 million, including $264 million for workers’ compensation, $146 million for state disability, and $63 million for state unemployment insurance. “The flagrant violator contractors don’t just steal from employees. They steal jobs from legitimate high road contractors, and their employees’ families,” said Bruce Wick, Director of Risk Management at California Professional Association of Specialty Contractors (CALPASC).  “All parties suffer, except the bad actor contractor, and the project owner who gets an unfairly low bid price. These wrongs must be made right, and this study helps point the way”. Construction workers informally employed earn less than those in the formal sector.  For every dollar earned by a construction worker employed in California’s formal sector, an unreported worker makes 52-cents and a misclassified worker 62-cents.  The total informal wage gap was $1.2 billion in 2011.  Households supported by an informal construction worker were three times more likely to live in poverty than households supported by a formal sector worker. “Construction once provided livelihoods for many workers to live the Californian Dream,” said lead researcher Yvonne Yen Liu.  “That dream has unfortunately turned into a nightmare as informality increases and many are pushed into contingent work.  Construction is a low-road model of an industry sinking underground.  Informality threatens to become the new normal.  To get back on our feet, California needs to raise the floor wage so informal workers are paid a fair wage and enforce labor standards.”

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Press Coverage

Advance Praise for Sinking Underground:

”Safeguarding working people and providing a level playing field for honest employers to prosper is essential for the vitality of California’s economy.  A just day’s pay for a hard day’s work should be a reality in every workplace.  Information from this report identifying abuses in the construction industry is a valuable tool for protecting workers as well as employers who play by the rules.” — JULIE A. SU, California Labor Commissioner

“To make the informal economy more formal requires innovative strategies to eliminate bad business practices, improve working conditions, and create better opportunities for mostly immigrant day laborers.  One cannot happen before the other — these strategies must take place simultaneously to ensure the integration of this workforce into a better economic situation. This report provides us with the detailed analysis of the informal construction industry for us to be able to engage in such an innovative process of strategy development.” — VICTOR NARRO, Project Director, UCLA Labor Center

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“Excellent report that helps shine the light of day on the pernicious practice of employee misclassification.  The problem is by no means limited to California, as much the same occurs in Texas and every other state in the country.  It is high time we enforce the law.  Misclassification cheats workers of overtime, workers comp, unemployment insurance, social security and just about every other workplace protection, but the harm to society is larger still.  Honest employers are driven toward bankruptcy by unfair competition, states are robbed of needed revenue, and a little more of the middle class is worn away each day we allow it to continue unchecked.” — RONNY CONGLETON, Texas Workforce Commissioner

“The flagrant violator contractors don’t just steal from employees. They steal jobs from legitimate high road contractors, and their employees’ families.  All parties suffer, except the bad actor contractor, and the project owner who gets an unfairly low bid price. These wrongs must be made right, and this study helps point the way.” — BRUCE WICK, Director of Risk Management, California Professional Association of Specialty Contractors (CALPASC)

“This research study proves what we in the industry have all know for decades.  This valuable information will raise awareness regarding the problem of the underground economy and help in the efforts towards cracking down on violators.” — MARK FOWLER, Executive Vice President, Western Wall and Ceiling Contractors Association

“The abuses uncovered in this report are both unfair and very costly for America.  In addition to chopping away the rights of workers, unreported work and misclassified work steal away the revenue needed to fund public investments like Medicare, education and infrastructure that build our economy and security in the long-run.  Employers who commit these abuses are stealing not just from their workers, but from the nation at large.” — ROBERT MCINTYRE, Director, Citizens for Tax Justice

“Sinking Underground provides valuable data and personal stories that together illustrate the destructive ripples that result from illegal treatment of workers. The paper clearly articulates why society must stop illegal activity that cheats employees, law abiding employers, and governments.” — ABBIE HUDGENS, Administrator, Tennessee Workers’ Compensation Division

Area of Work: Economy, People
Tags: Abuse, Construction, Day Laborers, Enforcement, Immigrants, Informal Economy, Laborers, Misclassification, Misclassified Work, Social Safety Net, Unfair Competition, Unpaid Taxes, Unreported Work, Worker Protection