The study, the first comprehensive estimate of job numbers that elude the usual government data-gathering methods, is based on 2005 figures and probably understates the true count by as much as 15 percent, says James Parrott, author of the study and chief economist of the New York research group. The institute defines jobs as underground if they are misclassified as independent contractor work or consist of employment by contractors who work “off the books,’’ a segment that has boomed with the explosion of residential construction in recent years.
The fiscal costs of the underground sector were $489 million in 2005 and likely to reach $557 million in 2008, the study said.
“Taxpayers are forced to pick up the tab for Social Security and the other payroll taxes that go unpaid when construction workers are hired off the books,” Parrott says. “And law-abiding employers are put at a real disadvantage, forced to bear many costs shifted to them from employers breaking the law.”
Costs fall into three categories: payroll taxes for Social Security and Medicare and social insurance premiums covering workers’ compensation, unemployment insurance and disability insurance ($272 million in 2005); forgone income tax collections ($70 million); and the shifted cost of employee health care onto the workers themselves, taxpayers and other employers ($148 million).
In addition to the fiscal cost, the underground construction labor market puts workers at risk, the study said. Last year, 29 construction workers were killed on the job in New York City. Half of the deaths occurred among workers at very small construction firms and three-fourths of the workers were employed by nonunion companies.
“It is surprising that (construction workers in the underground economy) is such a large number,” Parrott says. “It is a significant share of total construction activity in New York City. It’s puzzling that the problem has grown to this extent without a more concerted government response.”
The report called for better state and city enforcement of employment and tax laws and social insurance requirements. In addition, it said New York City and the state should require prevailing wages for all affordable housing contracts and any construction project benefiting from city and state funding, zoning or land action. The lack of prevailing wage standards has led to cutthroat competition and less-skilled and less productive workers, the report said.
But affordable housing developers criticized the idea of applying prevailing wage standards to affordable housing projects, saying it would raise the cost of such construction by 30 percent to 40 percent and greatly slow construction.
“I think it would be incredibly damaging,” says Ron Moelis, a principal at L&M Equity Participants, a major affordable housing developer. “Right now, the subsidy levels needed to build affordable housing or low-cost housing for lower- and moderate-income people are incredibly high. The city is currently putting not only land, but also millions of dollars into affordable housing, and we are barely making a dent.”