L.A.'S UNDERGROUND CASH STUDY FINDS EMPLOYERS IGNORE PAYROLL LAWS FOR 15% OF COUNTY WORKERS.

Byline: Beth Barrett Staff Writer

Los Angeles County's underground cash economy is expanding rapidly, eroding the work force and sapping an estimated $2 billion a year from city, state and federal coffers, according to a key finding in a major regional report scheduled to be released today.

Driven by what the report authors call economic desperation, the region's cash-only work force has grown about 5 percent in the past four years to nearly 680,000 workers - nearly half of them in the city of Los Angeles alone. They account for about 15 percent of the total Los Angeles County work force, according to the report on a Milken Institute study titled the ``Los Angeles Economy Project.''

At the same time, payroll jobs in the entire county that contribute with taxes and fees to the social safety net declined by roughly 2 percent - from 3.9 million to 3.8 million.

``Given this large number of informal jobs and the continuing practice by many employers of avoiding legally mandated payroll taxes, there is a real risk that a steadily increasing number of employers will adopt this illicit labor-management practice in order to remain competitive within the Los Angeles region,'' the authors concluded.

The region's underground economy is now estimated at $8.1 billion a year, siphoning off vast sums of money as workers and employers fail to make payments for Social Security, workers' compensation, health insurance and other social safety-net programs, according to Daniel Flaming, one of the authors of the segment by the Economic Roundtable, a nonprofit, public-policy research organization in Los Angeles.

``Over the long term, this trend portends a downward spiral for the regional economy as the low-wage labor force continues to grow, the costs of informal employment are shifted to other segments of society, and the social safety net becomes more precarious,'' the report says.

In an interview Tuesday, Flaming said many people in the underground economy can't find better jobs.

``There are several factors that create economic desperation: a slow recovery from the 2000 recession, a growing immigrant labor force that in all likelihood includes a growing undocumented labor force. Those workers, in particular, are desperate.''

And stemming the trend won't be easy, Flaming said. He believes it will require not only penalties for underground employers, but also incentives, such as technical assistance, for employers who compete legally, as well as efforts by both public and private organizations in education, skill development and citizenship programs.

Robert ``Bud'' Ovrom, deputy mayor of housing and economic development, said Mayor Antonio Villaraigosa is embarking on a strategy to address the underground economy.

The study released today - commissioned by former Mayor James Hahn - is part of what will be a more comprehensive blueprint.

``This issue of the underground economy is very much on our radar. ... We are using the report to develop a road map of the kinds of things we should be doing,'' Ovrom said.

Ovrom said the administration is interested in developing a package that stresses job creation, education and job training to make inroads into an economic system he called inherently exploitive. Cash workers don't have the kind of employment documentation that would allow them to move into the mainstream, he noted.

Underground workers - an estimated 61 percent of whom are noncitizen immigrants - are heavily represented in the garment, restaurant, housekeeping, gardening and construction industries.

``We are going to create more jobs, more opportunity, through work-force education ... (and) work-force investment programs,'' Ovrom said.

In its segment of the Milken report, the Economic Roundtable follows up on its May 2000 study that estimated there might be as many as 1.5 million workers in the underground economy siphoning off $1.1 million from social safety-net programs.

At the time, economic officials in the Hahn administration said they were working on programs to reverse the trend.

But that never happened to any significant degree, said Jack Kyser, chief economist at the private, nonprofit Los Angeles County Economic Development Corp.

``It's almost beyond the control of the city,'' Kyser said, noting that complex regional and state regulations are interwoven into what many employers and workers consider a generally restrictive business climate.

``In many cases, ... regulations are literally driving people into this informal economy,'' he said.

Kyser said the growth of the underground economy can be reversed only by a fundamental change in attitude.

``There needs to be a change in the mind-set ... that business is the enemy.''

Bruce Ackerman, president and chief executive of the Economic Alliance of the San Fernando Valley, said while the region's underground economy is growing, the 780,000 private, government and self-employment jobs reported in the Valley in 2004 mark an all-time high.

Ackerman said putting Los Angeles' economy on a more formal footing will require education and successful ways to address the culture of fear among illegal immigrants working in the underground economy.

``There's a huge fear factor there,'' he said.

Beth Barrett, [phone]

beth.barrett(at)dailynews.com

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The underground work force

SOURCE: Economic Roundtable