Sunday, 13 May 2018

The minimum wage, EITCs, and criminal recidivism

Much of the empirical literature on the minimum wage focuses on the employment effects. There is no strong consensus, though my reading of the latest research (see here) is that it broadly supports the dis-employment effects of the minimum wage. However, the minimum wage has a number of other effects. Last month I wrote a post on the effects (or lack thereof) on the cost of living.

On a similar theme of under-recognised effects of the minimum wage, a recent paper by Amanda Agan (Rutgers) and Michael Makowsky (Clemson) looks at the effect of minimum wages on criminal recidivism. This research is interesting, because the theoretical effect of a higher minimum wage is ambiguous, as Agan and Makowsky explain:
A change in the minimum wage could impact the labor market prospects of released prisoners, and thus recidivism, through a change in their likelihood of finding employment and/or through a change in the wage they can expect to earn if they succeed. The first of these, the employment effect, is at the heart of most economic studies of minimum wages... A reduction in labor demand and increase in the likelihood of unemployment stands to reduce the opportunity cost of returning to jail, increasing the probability of recidivism... This simple model also predicts a second wage effect that pushes in the opposite direction.
So, it isn't clear whether a higher minimum wage would decrease criminal recidivism (through higher wages making engaging in crime less attractive to working), or increase criminal recidivism (through jobs being harder to find, especially for ex-convicts).

Again and Makowsky also look at the effects of earned income tax credits (EITCs), which are paid to parents who are in work (in New Zealand, we have an EITC that is called the "in-work tax credit"). This is in effect a wage subsidy, so should increase low-skilled employment and wages. The effect of the EITC on criminal recidivism should theoretically be less ambiguous than for the minimum wage, but given that most female convicts are sole parents while most male convicts are not, the EITC effects should be concentrated among women.

The authors have data from 5.8 million prison releases in the U.S. (from 4 million prisoners) over the period 2000-2014. They find that, as expected: 8% increase in the minimum wage (the average increase over our time period) corresponds to a 2.8% decrease in the probability an individual returns to prison within one year over the average, with no discernible difference in effect for men or women. That is, the increased incentive to substitute legal employment for criminal market activity, on net, appears to be greater than any employment effects of reduced labor demand resultant of minimum wage market distortions. While our results are agnostic regarding the debates over the magnitudes of the employment effects of minimum wages, they do serve as evidence that wage effects, on balance, dominate employment effects in the decisions made by would-be recidivists... we find that the availability of state top-ups to the federal EITC corresponds to a 1.6 percentage point (7.1%) lower rate of recidivism amongst women, while having no significant effect on men.
Interestingly, their results imply that the effects (of both higher minimum wages and higher EITCs) are larger for those with less education. So, in evaluating the costs and benefits of higher minimum wages and wage subsidies, we shouldn't focus only on the disemployment effects. Even if higher minimum wages reduce employment, they may also reduce crime.

[HT: Marginal Revolution]

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