Title: Illegal Labor Markets
1Illegal Labor Markets
- Lent Term
- Ec 423 Labour Economics
- Lecture 9
2Legal vs. Illegal Sectors
- So far have consider two roles of occupation
selection High vs. Low skills - human capital/ signaling model
- Gender/Race segregation
- Can be other types of markets
- Informal Legal jobs not reported/measured in
standard activity - Black Market Trade/activity often in illegal or
restricted goods - Criminal Activity Illegal actions performed for
gain but not necessarily for the purpose of trade
3Whats Important about Illegal Markets?
- Important alternative way to allocate time
- May have different returns to human capital
- May have distinct career paths/specific
capital/OTJ training - Externalities
- High potential social costs to criminal
activities themselves - May generate costs for local areas (similar to
agglomeration issues for urban growth)
4Link to Legal Sector
- Wages
- Decision to enter or exit may be based on
expected wages - Strong interaction here with
- Returns to Education
- Education Production/Credit Constraints
- Discrimination
- Occupation Mobility
- May be long-term costs to entry into illegal
sector - Much more difficult to exit once detected
5This Lecture
- Model of Criminal Participation
- Focus on interaction with legal sector
- Wages in Legal vs. Illegal Sector
- Penalty for Participation
- Racial Composition
- Next time Focus on the Illegal Sector
- Taxing Participation
- Deterrence vs. Incapcitation
6Extreme Test for Economics
- Inherently risky attitudes toward risk are
critical in decision-making. - Criminal behavior is subject to strategic gaming
by the police, criminals, and the public, per the
Prisoner's Dilemma. - Psychology of Criminality
7Basic Model
- Individual will choose to commit crimes in a
given time period rather than do legal work when - (1 - p)U(Wc) - pU(S) gt u(w)
- Wc is the gain from successful crime
- p the probability of being apprehended
- S the extent of punishment,
- W is earnings from legitimate work
8Implications for legal wages
- Crime must pay a higher wage than legitimate
activities. - If p 0, U(Wc) gt U(W) only if Wc gt W
- As p rises the gap between Wc and W must increase
to maintain the advantage of crime. - Successful crime must pay off more the greater
the chance of being apprehended - May be non-pecuniary gains to crime (well
sidebar this for now but come back to it)
9Risk Aversion
- that attitudes toward risk are measured by the
curvature of U - Differences in responses to costs of crime
- changes in the chances of being apprehended
- changes in the extent of punishment
- Heterogeneity
- Clearly not likely to be the same as average RA
in population - May be lots of heterogeneity within those in the
illegal sector
10Costs and Opportunity Costs
- If we accept that sentences deter crime, must
suggest that some individuals on the margin
respond to costs - the major factors that affect the decisions to
commit crime - criminal versus legitimate
earnings, the chance of being caught, and the
extent of sentencing - are intrinsically related.
- If tougher sentences can theoretically reduce
crime then so may improvements in the legitimate
opportunities of criminals
11Crime Supply
- To get the supply of crimes and criminal
participation equations for the population,
aggregate to obtain the supply curves of crime - CPP f(Wc,p, S, W)
- CPP f(1 - p)W c - pS - W),p)
- CPR g(Wo,p, S, W)
- CPR g(1 - p)Wc - pS - W,p)
- where the first term represents the expected
value of crime versus legal work, and p measures
risk.
12Crime Demand
- For Informal and Black Market, Crime demand is
just the demand for the products supplied - Easy to imagine in the case of drugs or
prostitution - Generally, issue is elasticity of demand
- Victims' crime more complicated to think about
- Should be negatively related to Wc or to the
expected reward to crime ((1 - p)Wc - pS - W) in
a demand type relation. - Intuition 1 Additional crimes are likely to
induce society to increase p or S, cutting the
rewards to crime. - Intuition 2 As criminals commit more crimes,
they will move from more lucrative crimes to less
lucrative crimes.
13Market Equilibrium
- An upward sloping supply curve to crime and
downward sloping "demand" relation produce a
market clearing level of crime and rewards to
crime - comparable to the market clearing wages and
employment for other occupations or industries - Important implication for the efficacy of mass
incarceration in reducing crimes. - Simple demand-supply framework fails to explain
some important phenomenon - concentration of crime in geographic areas or
over time - Adverse effect of crime on legitimate earnings
14Returns to Incarceration
- A major benefit of incarceration is that it
removes criminals from civil society so that they
cannot commit additional offenses - Given the wide variation in crimes committed by
criminals, incarceration of chronic offenders
should have a particularly large effect in
reducing crime. - Inelastic Supply if you lock up someone who
commits, l0 muggings a year, no one replaces that
criminal in the alley, the number of muggings
should drop by 10 - Perfectly Elastic Supply if you lock someone who
commit, instant replacement and no decline in
crime
15Supply and Demand with Incarceration
Supply
WC
w2
w1
Demand
L1
L2
LC
16Theory and Evidence Based on Model
- Effect of Legal Employment/wages on criminal
participation - Does increased unemployment increase crime?
- Do increases in wages in certain sectors reduce
crime? - Does inequality affect crime?
17Exclusivity of Illegal and Legal Sectors
- Typically for ease, we think of crime/legitimate
work decision a dichotomous one, - The border between illegal and legal work is
porous, - persons commit crimes while employed - doubling
up their legal and illegal work. - Some persons use their legal jobs to succeed in
crime - Some criminals shift between crime and work over
time, depending on opportunities.
18Maximization Problem
- chooses time at market work (tm) and time
committing crime (tv) - Individual then
- subject to a budget constraint
- and a time constraint
- For simplicity set nonlabor income A0 and define
the marginal rate of substitution
19Participation conditions
- The individuals reservation wage u0.
- participation in the two sectors requires that
- w gt u0
- p'(0) gt u0
- the returns to the first hour of work in either
sector is greater than the reservation utility of
an individual
20Participation in the Insurgency
- An individual working in both the legal and
illegal sectors will choose their optimal time
allocation to satisfy p'(tV) w - to participate in both sectors p'(0) gt w
- Three groups
- Only Legal p'(0) 0 tv0, tmgt0
- Both p'(0) gt 0 tv gt0, tm gt 0
- Only Illegal p'(0) gtgt 0 tv gt0, tm 0
21Extensive vs. Intensive Margin
- In theory, can change crime labor supply both by
changing number participating and/or number of
hours available - Can put this together to estimate
22Unobservability of participation
- Difficult to observe true participation
- Use production function of crime in an area j at
time t as Ajt f (Ljt, Kjt) - Can Observe total number of crimes (i.e. output)
- Can now return this to our standard labor
economics framework - For many types of crime, extremely labor
intensive, dont need to worry about K - Labor
23Evidence Unemployment and Crime
- Large sociology/criminology literature doesnt
find much - Depends heavily on macroeconomic and time series
variation - Unclear what underlying forces drive market
activity and crimetypically left out of analysis - Not much natural experiment evidence on this
- Control for a bunch of stuff
- Structural model
24Mechanisms linking Crime and Economic Conditions
- Lots of things happen when the economy is worse
- Worse legitimate employment opportunities,
- More criminal opportunities
- Increased consumption of criminogenic commodities
(alcohol, drugs, guns) - Changes in the response of the criminal justice
system. - Rafael and Winters use this breakdown and then
use military contracts as an instrument for
employment opportunities
25First Stage
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27Bottom line Not much Evidence
- Controlling for other factors, almost all of
these studies report a statistically significant
but substantively small relationship between
unemployment rates and property crime (consistent
across lots of evidence) - Can explain an estimated 2 percent decline in
property crime (out of an observed drop of almost
30 percent) - Violent crime does not change
- May operate in indirect channels of state and
local government budgets. - increased spending on police
- prisons
28Issues with Estimation
- Most criminals have limited education and labor
market skills, poor employment records, and low
legitimate earnings. - For instance, the 1991 Survey of State Prison
Inmates reports that two-thirds had not graduated
high school, though many had obtained a general
equivalency degree - Among 25-34 year olds, approximately 12 of all
male high school dropouts were incarcerated in
1993. - The average AFQT score of criminals is below that
of non-criminals. - A disproportionate number of criminals report
that they were jobless in the period prior to
their arrest.
29Issues with Existing Evidence
- Those business cycles may not significantly
affect the outcomes of the worst off - Changes in unemployment not operating on correct
margin - Not observing same set of people affected by
jobs/wages/etc. - Crimes that may be most affected may be least
observable
30Incarceration in the US
31Long-term Labor Market Consequences
- Crime rates not just negative externality, but
huge costs for individuals in terms of lost
earnings - Why?
- Signal of quality
- Depreciation of human capital
- Loss of experience
32Identification issue
- Prison is not independent of other things
- Worse offenders in prison longer
- Least able in prison (?)
- Can try to separate out 3 effects
- Type of person who would be in prison (if prison
itself is unobservable) - Ever in prison
- Duration in Prison
33Evidence on Incarceration - 1
- Freeman's studies of the effects of criminal
activity on the labor market outcomes for youth
finds incarceration was significantly linked to
lower future employment and weeks worked, - Cannot say whether the link is due to the
sentencing or to the fact that only youths deeply
involved in crime are incarcerated. - In the NLSY young men who were incarcerated
worked around 12 weeks less per year as other
young men over an ensuing seven year period,
giving a 25 lower rate of work activity. - One reason for the huge incarceration effect in
the NLSY is that persons incarcerated have a high
probability of engaging in crime again and being
re-incarcerated and thus not able to work even if
they wanted to do so. - even among non-institutionalized young men, those
who have been to jail/prison have lower
employment rates than others and a lower rate of
employment than they had before going to jail or
prison ( - Nagin and Waldfogel (1995) find a positive effect
of conviction on employment in a sample of
British youths.
34Evidence on Incarceration - 2
- Bushway's (1996) analysis of the National Youth
Survey 32 found adverse effects from being
arrested on both weeks worked and weekly
earnings. - Within three yem's of an arrest, respondents who
were arrested worked seven weeks less, and earned
92 per week less, than would otherwise be
expected without an arrest - Grogger (1995) merged longitudinal arrest records
from the California correctional system with
unemployment insurance earnings records to
examine the effects of arrests and sanctions on
male employment and earnings. - Men who were arrested, convicted, or sent to jail
or prison had lower earnings and employment than
others, but more in the short-term than in the
long run. - Workers who went to prison had about a 20 lower
earnings than others, while those who went to
jail experienced about a 15 lower earnings - Attributed about one-third of black-white
differences in non-employment to the effect of
arrests on future employment. Waldfogel (1992)
finds a large effect of incarceration on earnings
and employment - The negative earnings effect is more pronounced
among white collar criminals, - 10-30 less 5-8 years after release than those
convicted but not incarcerated. - Conviction for embezzlement and larceny reduces
the future legitimate incomes by about 40, - Lott (1993a) shows even greater drops in
legitimate income, presumably due to reduced time
in legitimate work, for persons convicted of drug
dealing.
35Effect of Duration on Earnings
- What is the effect of longer incarceration rates
on earnings? (Kling AER paper) - Variation in judges generates variation in
sentencing - Judges are randomly assigned
- Look at earnings and recidivism rates (well
focus on the first one)
36Earnings by Duration in Prison
Source Kling, AER (1999)
37Identification
- Begin with simple OLS specification of earnings
(Y) on sentence length (S) controlling for
individual characteristics, X, - Data used in the paper has very small sample size
of observations on both pre- and post-spell
outcomes for the same individuals - to estimate the extent of any pre-existing
differences, he imposes a modeling assumption
that the association between incarceration length
and pre-spell outcomes is stable over time.
38How he estimatesOLS
- Fixed effects model
- Assume things are the same for individuals and
any deviation due to incarcerations so look at
same individuals, pre and post incarceration - Control for actual pre-existing differences and
then compare changes over time
39Source Kling, AER (1999)
40How he estimatesIV
- Model exogenous variation in sentence length
itself as function of judge (Z) - Identifying assumption
- Judge Assignment is random
- Some judges have preference for longer
sentences - Preference independent of underlying case
characteristics (or at least conditionally
independent)
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42Source Kling, AER (1999)
43Bottom line on Duration
- no substantial evidence of a negative effect of
incarceration length on employment or earnings. - In the medium term, seven to nine years after
incarceration spells began, the effect of
incarceration length on labor market outcomes is
negligible. - In the short term, one to two years after
release, longer incarceration spells are
associated with higher employment and earnings --
a finding which is largely explained by
differences in offender characteristics and by
incarceration conditions, such as participation
inwork release programs.
44Bottom-line on Incarceration
- Involvement with the criminal justice system
affects future labor market outcomes. - Incarceration is negatively correlated with
future outcomes while the correlation between
arrest and conviction and ensuing work activity
is generally more moderate. - The question remains open, however, about the
causal mechanisms, if any, that underlie the
links. - Moreover, the effects probably vary among groups
and over time and across prison experiences. - As more and more men are sent to jail or prison
- Any stigma attached to incarceration in the job
market may fall (it is less of signal) - The adverse relation between incarceration and
labor outcomes may also have a strong age
component, being larger among younger men and
smaller among older men in the declining part of
the age-crime curve. - Some evidence that prisoners who receive job
training or who work in prison have better
employment experiences after release than others.
45Is there a stigma to incarceration?
- The labor market prospects of ex-offenders are
likely to be impacted by whether employers have
access to their criminal history records. - Employers may be reluctant to hire job applicants
with criminal histories for fear that such
applicants may harm a customer or be more likely
to steal. - If employers can and do review criminal history
records, individuals with past convictions are
likely to be excluded from consideration. - Given the high proportion of blacks who have
served time, one might argue that such exclusion
should have particularly adverse consequences for
African-Americans.
46Holzer, Rafael, Stoller (2006)
47The effect of Criminal Background Checks
- Use variation in legality of employment checks to
measure likelihood of background checks - Look at employment rates of blacks
- Follow-up studies in sociology using names
approach on resume finds more mixed results - Hard to know how much is really due to
incarceration statistical discrimination vs.
other stuff
48Costs for Non-Criminals
- Employer review criminal history records may also
impact the labor market prospects of individuals
without criminal records. - If accessibility to criminal history information
is limited (due to cost, state prohibitions, or
the incompleteness of state and federal records),
employers may infer the likelihood of past
criminal activity from race - Such statistical discrimination would adversely
affect the employment outcomes of individuals
with clean histories that belong to demographic
groups with high conviction rates.
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51How big is the effect?
- about 30 of employers do not want to hire
ex-offenders but do not check criminal records. - For these employers, there is a total employment
reduction of 1.0-1.3 percentage points on a base
of roughly 10 percent (Table 2). - These data imply that statistical discrimination
of this type reduces the demand for labor among
black men by 10-13 percent, which can be regarded
as a lower bound to the true effect. - The extent to which this reduced demand
translates into wage and employment reductions
then depend, of course, on the relevant labor
demand and supply elasticities for this group
52The Illegal Sector
- Slightly outside the bounds of labor economics
- Prostitution/drugs/ etc. typically performed by
organized crime - Markets for illegal activity linked with markets
for informal activity - Negative externalities
- Increased crime in neighborhoods
- Reduced property values ? worse public goods, etc.
53Big Issue Observability
- Very hard to observe
- Prices
- Quantities
- Labor Supply/Demand
- Not clear how well defined market is
- Extortion/risk/costs of business
- Inelastic demand
54Growing work
- Economics of Organized Crime
- Mostly Theoretical on networks or organization
- Increasing Empirical focus, largely due to
international terrorism issues - Economics of Drugs/Drug Markets
- Addiction
- Penalties
- Rehabilitation
55Innovation in Illegal Markets Crack
- Crack cocaine is a smoked version of cocaine that
provides a short, but extremely intense, high. - The invention of crack represented a
technological innovation that dramatically
widened the availability and use of cocaine in
inner cities. - Sold in small quantities in relatively
- anonymous street markets, crack provided a
lucrative market for drug sellers and street gangs
56Observing Crack
- Really hard to do
- At the time, didnt really know what was
happening so not much data collection - Now, hard to observe ex-post
- Outcomes and correlates the same thinghard to
test what the causal effect was - Previous literature has mixed up outcomes
- Homicides
- Foster care
- Birthweight
- Hard to know what the true contribution of crack
might be
57Outcomes vs. Proxies
- Inputs into the index
- cocaine arrests and cocaine-related ER visits
- frequency of crack cocaine mentions in
newspapers, - Cocaine-related drug deaths
- the number of DEA drug seizures and undercover
drug buys that involve cocaine.
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59Outcomes - 1
60Outcomes - 2
61Drugs and Gangs
- An important aspect of illegal markets is that
the finance illegal activities - Most frequent concern is the role of drugs in
financing gangs and thus encouraging violence - Akerloff and Yellen (1994) model need 3 parties
the gang, the police and the populace - Concerns over negative externalities here are
very large
62Gang Organization
63Data
- Really not many sources
- Levitt and Venkatesh collect data in Chicago
gangs - We dont know how externally valid these are
- Provide important insight into gangs
64Average Financing of Gangs
65How much money per sale?
- back-of-the envelope suggest these estimates
are reasonable. Using - these revenue figures and average dollars per
sale of 10 - the number of sales per hour by a drug-selling
team ranges from five to twelve over the sample. - That frequency of sale is consistent with
self-reports of the participants as well as other
observational data
66Expenditures
- nonwage costs
- costs of drugs sold
- payments to higher levels of the gang
- Weapons
- payments to mercenary fighters
- funeral costs/ payments to families of the
deceased - The greatest nonwage expenditure of the gang was
the regular tribute payment to higher levels of
the gang. - almost 20 percent of total revenues.
67Returns to Gang Membership
- the gang leader retains between 4,200 and
10,900 a month as profit, for - an annual wage of 50,000130,000
- This value is well above what leaders could hope
to earn in the legitimate sector given their
education and work experience. otherwise would
have been, - The officers each earn roughly 1000 per month.
- These tasks are generally full-time jobs (in the
sense that the people who perform them would be
unlikely to be concurrently employed in the
legitimate sector)
68Return to gang-membership - 2
- Relatively low wages in the first few years
- In year four wages shoot up. Why?
- On the job training?
- Increased promotion/weeding out
- Tournament
69Evidence of Gang Tournament
70Next Time
- Economics of Crime The Costs side
- What happens if we increase the cost of crime?
- Increased Sentence Length
- Increase Probability of Detection
- Does response depend on type of crime?
- Does response depend on type of criminal?