The Economics of Crime
Ricardo Lagos

Introduction What determines criminal behaviour? Traditional social scientific thinking would point to age, sex, education, as well as family, and social and cultural background. But evidence has emerged indicating that economic incentives and decisions play an equally large part in criminal activity. This suggests that the solution for problems of rising crime should derive as much from the economist as it does from the criminologist. In this feature, Ricardo Lagos, assistant professor at New York University, argues that it is time to rethink the traditional approach to tackling crime.

Crime is always a sensitive political issue, as politicians around the world have found, often to their cost. They get blamed for rising crime; they rarely get credit when the crime rate falls. In Britain, for example, the Blair government is struggling to get to grips with significant increases in the crime rate after several years of decline. The talk is of getting tough with criminals and making the police more effective. But is it time to re-think the traditional approach to dealing with crime? A growing body of research into the economics of crime suggests that it is.

Crime keeps getting worse

Rising crime creates public alarm and sparks calls for tough measures to deal with criminals. But while many industrial countries have responded by pouring money into extra policing in order to catch more criminals and then send more of those they catch to jail and for longer periods, the long-term trend in most countries is a steady rise in the crime rate, once short-term fluctuations are taken into account. This has led some to question the efficacy of traditional methods of dealing with crime.

Over the years, social scientists have identified a wide range of factors which help determine criminal behaviour. These include age, sex and the level of education as well as family, social and cultural background. But since the first economic analysis of crime by Gary Becker in 1968, economists have become increasingly convinced that economic incentives may be a crucial determinant of criminal involvement, at least in property crime. The unifying principle of this approach is that underlying most crimes and criminal careers there is an individual evaluating costs and benefits. Identifying and understanding the mechanisms that shape people's criminal decisions is important because these mechanisms hold the solutions to the crime problem. Understanding how criminals respond to economic incentives could therefore provide new and useful policy tools for the fight against crime.

The basic equation

From an individual's point of view, a key element entering the criminal decision must be the rate of return on illegal activities relative to the rate of return on legitimate ones. The expected pay-off depends on three factors: the size of the reward (supposing the crime was successful); the probability of being caught and convicted; and the severity of the punishment. The opportunity cost of engaging in criminal activity is given by the rate of return on legitimate market activity. This depends on the wage at which the person could find employment; the likelihood of employment (i.e. the chances of finding a job if that person is unemployed and of keeping it if they are employed); income during periods of unemployment; and future job prospects (such as expected wages and the probability of getting and keeping a job).

Leaving aside the potential reward from criminal activity, we would expect a negative correlation (or inverse relationship) between the factors listed above and the crime rate. If potential criminals do respond to the relative rate of return from crime as determined by those variables, then changes and trends in crime rates could in turn be associated with changes and trends in these variables. This would then provide policymakers with a much wider range of policy tools with which to try to combat crime. But how much evidence is there for the link suggested?

A convincing tale

The US offers a particularly rich quarry of material. The crime rate in America has dropped significantly over the last 20 years: the crime rate per 100 inhabitants was 5.95 in 1980 and 5.09 in 1996. The sharpest reduction was in the property crime rate which fell from 5.60 per 100 inhabitants in 1980 to 4.65 in 1996 (a 17 percent fall). Recent work by Ayse Imrohoroglu, Antonio Merlo and Peter Rupert examined the reasons for this reduction. They noted that between 1980 and 1996 some of the variables we identified earlier changed significantly. For example, spending on the police increased from 0.6 percent of Gross Domestic Product in 1980 to 0.7 percent of GDP in 1996. As a result, the proportion of property crimes that ended with an arrest rose from 16.8 percent in 1980 to 18.5 percent in 1996, thus significantly increasing the criminal's chance of being caught. Another important factor was the rise in the real wage from $16,770 in 1980 to $18,670 in 1996 (both expressed in 1990 dollars): this represents an increase in the opportunity cost of going into crime.

Detailed analysis of their findings led the authors to conclude that the main factors responsible for the reduction in the aggregate property crime rate in the US between 1980 and 1990 were (ranked in descending order of importance): the increase in the likelihood of being caught resulting from the rise in spending on the police, the increase in the real wage and the change in the demographic structure.

Demographic factors are important because a large fraction of crime in the US is committed by youths aged 18 or below. The proportion of young people in the total population declined in the 1990s: 20.5 percent of the population was aged between 15 and 25 in 1980, but that had fallen to 15.1 percent by 1996. Since youths have a higher propensity to engage in crime, the reduction in the fraction of youths as a result of the demographic transition contributed to the decline in the crime rate.

The penalties matter

Other recent research has looked at evidence of how particular groups respond to incentives to engage in or avoid criminal activity. Again, the role of young people in crime is of particular interest. Although the overall crime rate in the US has fallen over the past 20 years, the crime rate for youths has risen significantly in the US. The youth arrest rate for murder, for instance, rose by 177 percent between 1978 and 1993, while the adult arrest rate fell by 7 percent throughout the same period. Similarly, the arrest rate for violent crimes rose by 79 percent for youths and by 31 percent for adults between 1978 and 1993. This seems, on the face of it, puzzling.

Steven Levitt has examined whether the different patterns of youth and adult crime could be seen as a rational response to changes in the likelihood and severity of punishment for these groups. According to approximate measures of the likelihood and severity of punishment, Levitt argues that the severity of punishment for youths was roughly the same as for adults in 1978 but only half as severe in 1993. His analysis suggests that 60 percent of the difference in the growth rate of crimes committed by adults and youths can be explained by the relative change in severity of punishment between both groups. This suggests that youths do take account of changes in the likelihood and severity of punishment when deciding whether to become involved in crime. And other evidence supports this analysis: there are sharp changes in criminal involvement with the transition from juvenile to adult court. Violent crimes committed by youths coming under the jurisidiction of adult courts fell by 4 percent in those states where juvenile courts are lenient relative to adult courts, but rose by 23 percent in those states where juvenile courts are severe vis-à-vis adult courts.

Wages matter too

Falling wages for young people have also played a part in the rising figures for youth crime, according to research by Jeffrey Grogger, who documented the relationship between wage levels and the crime rate. He concluded that criminal behaviour among youths is highly responsive to the potential earnings from legitimate activity. According to his calculations, a 10 percent wage increase would bring about a 6 percent to 9 percent reduction in criminal activity among young people. What's actually happened since the mid 1970s is a fall in the real wages of young people of roughly 20 percent--which on Grogger's analysis would have resulted in a 12 percent to 18 percent increase in their crime participation.

It's worth noting Grogger's conclusion that wage differences are partly responsible for the differential participation in crime between blacks and whites in the US. It is well known that blacks earn less than whites, even when both have the same observable characteristics (such as age, education, experience and type of work). In addition, police records seem to show that in the US, blacks have a higher propensity to participate in criminal activities. Grogger's analysis suggests that this is in part a labour-market phenomenon: the fact that blacks earn less than whites accounts for a third of the difference in criminal participation between both groups. Recent Centre for Economic Performance research has found strong evidence from UK data to support the idea of a negative relationship between wages (in particular wages at the lowest end of the wage distribution) and crime.

The lessons for policymakers

There is a wealth of other evidence to support the idea that there is a clear relationship between incentives and crime. These "incentives" should be understood in the broadest sense, to include the likelihood of being caught and the severity of the punishment as well as those which explicitly determine the costs and benefits of criminal activity. The evidence for such relationships appears strong enough for at least some analysts to argue that anti-crime policies should take account of them. The positive correlation often found between measures of income inequality and the property crime rate, for instance, has led some economists to suggest redistributive taxation as an anti-crime policy. And recent work by this author and others suggests that under some conditions, more generous unemployment benefits can reduce the crime rate provided at the same time punishment is sufficiently likely and severe. (If the penal system is too lenient, increases in unemployment benefits may have perverse effects on crime.) Policymakers tend to address economic problems with the economist's toolkit and crime problems with the criminologist's toolkit. So concerns about the welfare of the unemployed are dealt with by proposals for more generous unemployment benefits, while rising crime leads to calls for more police. But the fact that we know how criminals and would-be criminals react to certain economic and other incentives opens up a whole new role for economic anti-crime policies. When the crime rate is too high, the policy menu consulted to remedy the situation should include economic as well as traditional anti-crime policies. And the optimal way to respond will almost surely include a mix of both.

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This article is taken from CentrePiece magazine published by the Centre for Economic Performance at the LSE. Copyright The London School of Economics and Political Science.