In the paper, Nguyen looks at how changes in the costs of licensing in the (legal) market for massage services affect the market for sex services and the associated externalities (in terms of health and crime). She distinguishes between two sectors: (1) the quasi-legal sector (e.g. erotic massage parlours); and (2) the illegal sector (escort services). Only the quasi-legal sector is subject to licensing costs.
So, first some economic theory. If the licensing costs for the quasi-legal sector decrease, we would expect an increase in supply in the quasi-legal sector, and a decrease in price (and increase in the number of services performed) in that sector. Some illegal sector suppliers will shift into the quasi-legal sector because of the lower costs. So, we would expect decreased supply in the illegal sector. Alongside this, because the price of quasi-legal services have reduced (and services from the quasi-legal and illegal sectors are imperfect substitutes for each other), we would expect a decrease in demand in the illegal sector. Overall, the quantity of services in the illegal sector will reduce, but the effect on the price of illegal services is ambiguous (the change will depend on the relative size of the shifts in demand and supply).
Now, because the sex services performed in the quasi-legal sector are typically less risky (more manual stimulation, less intercourse), then we would expect public health benefits from this shift. Nguyen does provide some support for this assertion in her paper. Overall the shift to less risky services should means less transmission of STDs, resulting in lower incidence of gonorrhea and chlamydia (as well as syphilis, HIV, etc.).
Nguyen uses an interesting natural experiment based on California data. Prior to 2009, the licensing fees varied widely for different cities, but in 2009 the fees were standardised. Some cities faced a substantial reduction in fees, while others faced no change. That provides the treatment (decreased fees) and control (no change) groups for the natural experiment. Then in 2015 California unwound the changes, which provides a second natural experiment.
You may be worried (and rightly so, it turns out) that the areas with the highest licensing fees prior to the change are systematically different from those with the lowest licensing fees, in ways that are important. So, Nguyen employs and instrumental variables approach (which I have earlier discussed here). Her instrument of choice is the fees for alternative business sectors (retail and professional services), which can plausibly be related to the fees for massage services but are unlikely to be directly related to the outcome variables (which are price and quantity of services, STD rates, and rape reports).
Nguyen finds support for the simple descriptive demand-and-supply analysis above. In terms of the health and crime externalities, she finds:
In the case of prostitution and massage, reducing licensing costs for the quasi-legal sector increased the total size but also reduced the overall riskiness of the black market for prostitution. For the average massage licensing fee reduction observed in California, gonorrhea rates fell by 16.3% for the general population and by 13.5% for the predominant sex worker demographic, Asian females. Chlamydia rates also fell by 1.73% for Asian females, while forcible rapes declined by 19% for the general population. These improvements to health and crime can be attributed to reductions in illegal prostitution consumption and risk-taking behavior in the quasi-legal prostitution sector.The trade-off appears to be a significant impact on the legal massage sector (i.e. the massage sector that does not include sex services), which she attributes to competition from the quasi-legal sector. She writes:
...the consequent 138% growth in quasi-legal prostitution also reduced the supply of legal massage by 45.6%. Thus, reducing the barriers to entry makes the black market safer at the expense of the legal sector.Overall though, the paper provides some food for thought, in terms of alternatives to full legalisation if harm reduction in the sex services sector is a policy goal but full legalisation is politically untenable. Or alternatively, read in reverse it provides some idea of the consequences of increasing licensing fees to try and prevent quasi-legal operations.
[HT: Marginal Revolution, back in December last year]