The Breakdown | Explaining Southern California's economy
Business & Economy

1 in 6 California construction jobs part of underground economy, study finds

The study found informal construction workers earn half of what their formal counterparts bring home.
The study found informal construction workers earn half of what their formal counterparts bring home.

California's construction industry is sinking underground. That's the conclusion of a new study from the Los Angeles-based Economic Roundtable that found more than 143,900 jobs – or one out of six jobs –in California's $152 billion construction industry were part of the so-called underground economy in 2011. Of those, 104,100 jobs were unreported by employers and more than 39,000 employees were misclassified as independent contractors. 

The study, underwritten by the United Brotherhood of Carpenters, found the number of construction workers in the underground economy has skyrocketed 400-percent since 1972.

Researchers defined the underground or informal economy as workers who were not protected legally or socially in their jobs. Particularly vulnerable are immigrants, who made up 43-percent of the California construction labor force in 2012. 

“Construction once provided livelihoods for many workers to live the Californian Dream,” lead researcher Yvonne Yen Liu said in a statement.  “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.”

The study found the number of workers exploited greatly increased during the Great Recession, and now four years later, conditions haven’t improved.

And it's not just construction workers who are threatened, says Liu. That's because labor practices originating in construction – like misclassifying workers as independent contractors when they should be employees – can trickle down to other industries.

"Misclassification was something that started in construction," said Liu. "This is something we're now seeing in the so-called 'sharing economy.'"

Other findings from the study:

  • The informal tax gap in 2011 was estimated to total over $774 million. The federal government lost $301 million in taxes and California lost $473 million. California unemployment insurance was cheated of $63 million, state disability $146 million, and workers’ compensation $264 million. These are conservative estimates, which only include unpaid payroll taxes and not income taxes.

  • If the wage floor for informal construction was raised to the level of formal workers, California would benefit from $1.5 billion in economic stimulus. The federal government would receive $120 million in additional tax revenue, state and local government $100 million. Unemployment insurance, workers’ compensation, and state disability would receive $1.6 million. 

  • From 1968 to 2012, an annual average of 20 percent of construction workers were not employed. Between 1988 and 2013, half of the unemployed lost their jobs involuntarily.

  • Informal construction contributes to the hollowing out of the middle class. Thirty percent of households with an income earner working informally in construction earned below-poverty wages. Households supported by an informal construction worker were three times more likely to live in poverty than households supported by a formal construction worker.

  • Informal construction workers earn half of what their formal counterparts bring home. For every dollar earned by a worker in the formal sector, an unreported worker makes 52 cents and a misclassified worker 64 cents. The total informal wage gap was $1.2 billion in 2011.

  • Specialty trades, such as drywall, have the highest level of informality, over 25 percent employed informally in 2012. Building construction was next, with 20 percent estimated to be informal. Little evidence of informality was found in heavy and civil engineering.

  • Construction has difficulty recruiting and retaining young workers. Many younger, lower paid workers are churned, entering and then leaving the industry after short stints. The median age for those who stayed in the industry was 38 while those leaving and entering were 4 to 6 years younger.

David Kersh, Executive Director of the Carpenters/Contractors Cooperation Committee, a construction labor watchdog group, said the study quantitates the sorts of violations he hears about everyday, including ones at large-scale private and taxpayer funded construction projects.

"We come across these types of unlawful business practices at schools, colleges, universities, libraries, airports and other government facilities; at multi-unit housing projects and high-rise buildings," Kersh wrote in an e-mail. "They involve regional and international contractors and developers, and companies employing from dozens up to 200 workers on a single project, as evidenced in the situation of National Drywall, a drywall subcontractor recently debarred by the Division of Labor Standards Enforcement from working on public works projects for defrauding the state and whose workers have received $1 million in owed wages for labor violations."