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Working Paper

Crime and the Labor Market: A Search Model With Optimal Contracts

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This paper extends the Pissarides (2000) model of the labor market to include crime and punishment à la Becker (1968). All workers, irrespective of their labor force status can commit crimes and the employment contract is determined optimally. The model is used to study, analytically and quantitatively, the effects of various labor market and crime policies. For instance, a more generous unemployment insurance system reduces the crime rate of the unemployed but its effect on the crime rate of the employed depends on job duration and jail sentences. When the model is calibrated to U.S. data, the overall effect on crime is positive but quantitatively small. Wage subsidies reduce unemployment and crime rates of employed and unemployed workers, and improve society’s welfare. Hiring subsidies reduce unemployment but they can raise the crime rate of employed workers. Crime policies (police technology and jail sentences) affect crime rates significantly but have only negligible effects on the labor market.
10.01.2007ISSN 2573-7953 WP 07-15DOI 10.26509/frbc-wp-200715
Keywords crime, unemployment, search, matching
JEL Classification Codes E24, J0, J63, J64

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Engelhardt, Bryan, Guillaume Rocheteau, and Peter Rupert. 2007. “Crime and the Labor Market: A Search Model With Optimal Contracts.” Federal Reserve Bank of Cleveland, Working Paper No. 07-15. https://doi.org/10.26509/frbc-wp-200715