Part Two: The Extent And Economic Costs Of Worker Misclassification In The Massachusetts Construction Industry

Introduction

We quantitatively assess the extent and economic costs of worker misclassification in the state’s construction industry using two overarching approaches. First, we have been provided a substantial amount of data by three state agencies in Massachusetts: the Department of Unemployment Assistance (DUA), the Department of Revenue (DOR), and the Department of Industrial Accidents (DIA). Most prominently, this includes the results of employer payroll audits as conducted by the DUA in its role overseeing the state’s unemployment insurance system; this provides direct evidence of illegality in the Commonwealth. This analysis is supplemented by business tax records and 1099-MISC filings from the DOR, the first known use of such records in a study of payroll fraud in the construction sector. We further incorporate data from the DIA to examine patterns in workers’ compensation insurance claims that reflect illegal labor practices in the Massachusetts construction sector.

Data provided by state agencies offers considerable perspective on wage and tax fraud, however government data is incomplete; after all, those engaged in illegality often go to great lengths to conceal their actions from government regulators and data collectors. As such, this study also utilizes indirect empirical methods designed to assess the full extent and costs of payroll fraud in the Massachusetts construction industry. Indirect measures are commonly used in studies of underground economic activity, as discrepancies between two data sources often indicate illegal behavior. Although these approaches are inexact and the resulting estimates include a nontrivial margin of error, the indirect methods applied in this study represent the most advanced techniques of using publicly-available data to assess the full extent and economic costs of wage and tax fraud in the sector.