Want another reason to increase minimum wages? How about reducing crime?

A new study by Amanda Y. Agan of Rutgers and Michael D. Makowsky of Clemson examines the relationship between minimum wage increases and recidivism rates among former prisoners, using data from 2000 to 2014 from 42 states. This topic has important social ramifications, given high rates of incarceration in the US combined with the difficulties former prisoners have in re-establishing themselves economically when released. The study points out that over 600,000 people are freed from prisons every year, yet almost 1/3 return within three years of being released. We’ve embedded the study at the end of this post.

Debates over minimum wage increases focus on whether the wage rise is actually a net benefit to workers overall. Opponents contend that the wage effect (the greater pay) can be fully offset by employers cutting back on their use of workers to prevent their labor costs from rising. The way this translates in econ-speak is that the wage effect (more pay) can be offset by the employment effect (more difficulty in getting a job).

Given that ex-cons are likely to find it hard to get back into the workforce to begin with, many who do find work will wind up in minimum or near-minimum wage jobs. And more so than other workers, they may regard what the authors call “criminal market activity” as an alternative to wage labor.

Their main findings:

Exploiting the various state and year variation in minimum wages over our time period, we find that an 8% increase in the minimum wage (the average increase over our time period) corresponds to a 2% 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. This suggests that the wages of criminal market activity are greater than those that can be expected by ex-offenders in the legal market for low-skilled labor.

So crime does pay in a McJobs economy. They also found that increasing minimum wages did more to reduce recidivism than a raft of programs designed to do just that:

Nearly half of the $125 million budget for the Second Chance Act Prisoner Reentry Initiative was ear- marked for released prisoner employment programs (GAO 2011). Summarizing the “flurry of community-based employment interventions, generally involving some combination of job readiness, job training, and job placement services” implemented between 1971 and 1994. Visher et al. 2005 identify eight programs that were designed with an eye towards testable outcomes. While these ex-offender jobs programs likely have a range of genuine benefit to their participants, none produced statistically identifiable reductions in recidivism rates. Further, the intent of these and similar policies not withstanding, the balance of U.S. la- bor policy is very much against those with criminal records.3 Given the limited efficacy of past policies, and the political obstacles to passing legislation targeted to support individuals with criminal records, understanding the impact of broader labor policies is critical to efforts towards reintegrating released prisoners back into the workforce and breaking the cycle of crime and imprisonment.

Moreover, the fall in crime rates occurred in categories that made money:

These reductions in re-convictions are observed for the potentially revenue generating crime categories of property and drug crimes; prison reentry for violent crimes are unchanged, supporting our framing that minimum wages affect crime that serves as a source of income.

Agan and Makowsky also looked at whether access to state Earned Income Tax Credits would reduce recidivism rates. Their conclusion:

The availability of state EITCs also reduces recidivism, but only for women. Given that state EITCs are predominantly available to custodial parents of minor children, this asymmetry is not surprising….Using state and year variation in the availability of state EITCs, we find that the avail- ability 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. Focusing on the differing sizes of the state top-up as a percent of the federal EITC, we find that a one standard deviation increase in the state EITC corresponds to a 6% (0.09pp) reduction in the expected recidivism rate for women.

We’ve embedded the paper below. The authors ran quite a few robustness tests and also considered questions like “Was the minimum wage increase due to an improving economy and could that explain the fall in recidivism?”

It is over my pay grade, but for those with access to the data, it would be useful to do a back-of-the-envelope calculation on how much it might be worth in societal terms to have achieved this reduction in recidivism. Among other things, you have the value of freeing up police to do other things, and savings in court and prison costs, and of course, eliminating the direct costs of crimes. And since 53% of the people who go to prison have children, there are other hard and soft benefits to lowering recidivism rates.