Atl Econ J (2012) 40:319

DOI 10.1007/s11293-012-9302-x

Crime, Job Searches, and Economic Growth

Juin-jen Chang & Chi-Hsin Wu

Published online: 29 February 2012

# International Atlantic Economic Society 2012

Abstract This paper constructs a theoretical model with which to analyze the
puzzling links between unemployment and crime rates, described in the literature.
Most theoretical papers on crime, such as Becker Journal of Political Economy
76, 169217, (1968), Ehrlich Journal of Political Economy 81, 521565, (1973),
and mrohorolu et al. International Economic Review 41, 125, (2000), emphasize
the analysis of the equilibrium crime rate, dealing with the unemployment rate as an
exogenous parameter, but little attention has been devoted to investigating the influence
of the criminal market on the equilibrium unemployment rate in the labor market and
how these markets interact. This paper illustrates how the causes of crime play a crucial
role in the unemployment-crime relationship, wherein different causality result
in different associative relationships between unemployment and crime. The
aforementioned conclusion illustrates the theory explaining why the empirical
findings related to the unemployment-crime relationship are mixed and equivocal.
Second, this paper describes the diverse origins of crime, in which employed workers
and unemployed workers have different incentives for entering a life of crime.
Employed and unemployed workers assume different opportunity costs by engaging
in criminal activities, resulting in different effects on the economy. This explains why
crime rates relative to unemployment rates in different countries could be either
procyclical or countercyclical.

Keywords Crime . Economic growth . Job search

JEL K14 . O12 . J64

J.-j. Chang
Institute of Economics, Academia Sinica and Fu-Jen Catholic University, Taipei, Taiwan

C.-H. Wu (*)
Department of Labor Relations, National Chung Cheng University, 168 University Road,
Minhsiung Township, Chiayi County 62102 Taiwan, Republic of China
e-mail: osmond@mai12000.com.tw
4 J.-j. Chang, C.-H. Wu

Introduction

In the 1960s, criminal activities in economic literature began receiving increased

attention. Ever since Becker (1968) and Ehrlich (1973), economists have been
devoting considerable attention to criminal activities. In the 1980s and 1990s,
economists embarked on an investigation into the relationship between crime and
the economy, naming it the economics of crime, which shifted the concern from
pure deterrence hypotheses to an analysis of the impact of criminal activities on
socioeconomics and demography. In other words, research concentrating on the
effects of changes in detection probability and the severity of sanctions has shifted
to issues concerning worker ability, unemployment, human capital, income, and its
unequal representation with regard to race, the level of urbanization, and gender.
Over the past few decades, researchers addressing the economics of crime have
encountered a number of puzzling issues regarding criminal activities, which demand
further study and analysis. Conventionally, it has been believed that poor economic
conditions lead to unemployment, which in turn fosters crime. These assumptions led
to the conclusion that crime rates are procyclical in relation to unemployment rates.
However, such a positive relationship is not unequivocally supported by empirical
evidence. In a study by Box (1987), it was found that 19 out of 32 major indicators
confirmed a positive relationship between unemployment and crime, while the
remainder failed to support any such relationship. As a matter of fact, many other
studies, such as those conducted by Cooter and Ulen (1988), Young (1993), and Eide
(1994), have shown that the relationship between unemployment and crime rates
could even be countercyclical.1
This paper presents a theoretical model to analyze the link between unemployment
and crime rates by exploring these contentious issues within the context of a simple
search model. Despite its simplicity, this model provides a more complete picture of
the interactions between the labor market and the criminal market. The analytical
framework comprises a number of novel characteristics, such as the friction involved
in matching job searches with vacancies, negotiations between workers and firms,
government budgets, and economic growth; all of which help to clarify the issues. In
this paper, individuals make a rational decision to either search for a legitimate job or
participate in crime. Consequently, the size of the criminal market, the unemployment
rate, the effective labor force, and the proportion of earnest job searchers can be
endogenously differentiated from the aggregate labor force. These salient features are
a clear departure from those in the existing literature. Most theoretical papers on
crime, such as Becker (1968), Ehrlich (1973), and mrohorolu et al. (2000) have
focused on the equilibrium crime rate, dealing with unemployment as an exogenous
parameter, paying little attention to the influence of the criminal market on the equilibrium
unemployment rate or on the manner in which these two markets interact.2
This model is helpful in providing a plausible explanation concerning the procyclical
or countercyclical nature of the relationship between unemployment rate and crime rate.
First of all, Young (1993) determined that the relationship between unemployment and
crime is not always simple one. This paper illustrates how the causes of crime play a

1
See Ehrlich (1996) for a detailed survey.
2
See Freeman (1999) for a detailed survey.
Crime, Job Searches, and Economic Growth 5

crucial role in the unemployment-crime relationship, wherein different causes result

in different associative relationships between unemployment and crime. On the other
hand, the effective labor force is determined endogenously, particularly when the
economic effects of criminal activities are taken into account; in another words, the
crime rate could be either procyclical or countercyclical in relation to unemployment
rates. This conclusion provides a theoretical foundation for the empirical evidence
regarding the relationship between unemployment and crime, indicating that they are
mixed and equivocal.
Secondly, this paper describes the diverse origins of crime, in which employed
workers and unemployed workers have different incentives for entering a life of
crime. Employed and unemployed workers assume different opportunity costs by
engaging in criminal activities, resulting in different effects on the economy. This
explains why crime rates relative to unemployment rates in different countries could
be either procyclical or countercyclical.
This paper also investigates the means by which the crime rate influences
unemployment and economic growth. Bean and Pissarides (1993) established an
overlapping generation model with searching-matching in the labor market with
which they found that a positive or negative correlation between unemployment
and economic growth depends on the structure of the economy. Aghion and Howitt
(1994) also used an endogenous growth model to show that the relationship between
unemployment rates and growth rates is a hump type relationship. Nonetheless, a
number of intervening factors may indirectly influence the performance of economic
growth and unemployment, e.g. the impact of crime on the market. An endogenous
growth model of job searches and crime was developed to provide a clearer, more
complete illustration of the conflict between empirical results and theory.
The remainder of this article is organized as follows. In Section The Model, we
establish a general endogenous growth model of job searching, using it to identify the
means by which individuals decide to accept a legitimate job, live on unemployment
benefits, or participate in criminal activities. In Section Firms, we use this
framework to provide a plausible explanation for the lack of consistency between the
literature and empirical data. In Section Labor Market and Crime Market, we
extend the model to re-examine the relationship between unemployment and economic
growth with different criminal origins. Finally, we present our main concluding remarks
in Section The Wage Bargain.

The Model

The economy comprises three types of agents: households, firms, and the
government. The shares of a number of firms are owned by households. The
firms produce goods using labor and physical capital through CobbDouglas
technology, with wages and job matches determined through negotiation.
Households derive utility from consumption and (if employed) inelastically provide
firms with their labor. As in common growth models, the population growth rate is
normalized to zero. Finally, the government levies a lump-sum tax to finance
unemployment benefits, transfer payments for convicts, and the cost accrued for
the detection of crime, with a balanced budget in each period.
6 J.-j. Chang, C.-H. Wu

Firms

Following Mulligan and Sala-i-Martin (1993), firms hire physical capital k and labor
l to produce single final goods y and the production function is expressed as:

 1a
y f k; k; l Ak k a l b ; 0 < a; b < 1; 1

where k is the average economy-wide stock of capital. The production of individual

firms is influenced by the external effect of the average capital stock in the economy
rather than by the aggregate capital stock in the economy. In addition, Wu and Zhang
(1998) point out that the production function is contingent on a productivity exter-


nality, captured byA k . The external effect signifies that the spillovers of knowledge
manipulate the average level of the overall economy. For the purpose of convenience,

 1a
we specify thatA k Ak , suggested that the aggregate production function
shows constant returns to scale, thereby generating ongoing growth.
Given the production function, the firm attempts to maximize its profit as follows:
p y  wl  rk; 2
where w and r are the wage rate and interest rate of capital, respectively. Thus, the
optimal condition for firms capital is:
1a a1 b ay
r MPk aAk k l : 3
k
This indicates that the marginal capital return is the optimal condition for deter-
mining the capital stock of each firm equal to the cost of acquiring the capital.

Labor Market and Crime Market

There is a [0.1] continuum of infinite-lived and risk neutral workers and workers are
ex ante identical. At any period, a worker can be in one of three states: employed,
unemployed, or in jail. The numbers of workers in each state are l, (1ln), and n,
respectively. While employed, workers receive wage w, and leave their jobs for
exogenous factors at job destroy rate . While unemployed, workers receive a flow
payment B (unemployment subsidy) and receive job offers at rate l. To match actual
conditions, we specified that the success rate of finding jobs depends on the number
of the vacancies v, therefore l0l(v) and lv >0. Finally, agents in jail receive a flow
payment Z3 and are released at rate y in which they re-enter the unemployment pool.
For convenience, we assumed that the exogenous release rate y was not dependent on
time or the person. Meanwhile, to include the interaction between labor market and
crime market, let 0 and 1 be the ratio at which unemployed and employed workers
commit crimes, respectively. Moreover, let be the probability of detecting crime or
being sent to jail. Thus, by collating the aforementioned statements, we know the
inflow and outflow of employed workers are l(v)v and (+1)l; likewise, the inflow

3
The domestic demands of convicts are paid by the government that can be deemed as the transfer
expenditures Z paid by the government to the convict and Z<W, B meets realistic hypothesis.
Crime, Job Searches, and Economic Growth 7

and outflow of convicts are d 1 fl d 0 f1  n  l and yn, respectively. In equilib-

rium, the numbers of employed worker and convicts are:
lvv
l l v; ; d 1 ; f; 4
d 1 f

d 0 f fd 1  d 0 l
n nl; d 0 ; d 1 ; f; y : 5
y d 0 f
Equation (4) is the expression of the equilibrium employment number, also known
as the modified Beveridge curve (Blanchard and Diamond 1989).
The ex-ante expected gain from crime is identical regardless whether convicts are
employed or unemployed, equal to the average of aggregate instantaneous gain
from crime. For simplicity, we assumed that the instantaneous gain of unemployed and
employed workers G from crime were the same; therefore, after committing a crime,
the net expected payoffs for unemployed workers Mu and employed workers Me
are:

M u G fJ 1  fU u ; 6

M e G fJ 1  fU e ; 7
u e
where U and U are defined as the expected discount wealth of unemployed and
employed workers, J refers to the number of convicts in jail. The preceding setting
allows unemployed workers to have the probability l(v) to find jobs with the
probability 0 to be sent to jail for crime. Hence, the asset equation of state transfer
expected by unemployed workers is:

U u B  T d 0 M u  U u lvU e  U u ; 8
where is the rate of time preference and T is lump-sum tax. The same setting allows
employed workers committing crime to have the probability of losing their jobs and
1 of going to jail. In addition, convicts return to the unemployment pool at the
release rate y. The value equations of employed workers and convicts are:
U e W  T d 1 M e  U e U u  U e ; 9

J Z y U u  J : 10
To understand the interaction between the labor market and crime, we
discuss the economic significance of criminal activities in line with Burdett
et al. (2004).
In this study, we focused on the interaction between crime and employment and
the impact of crime on economic growth, to discuss the impact caused by the
aggregate crime rate rather than simply comply with the issues discussed in the
literature related to the economics of crime. Crime and personal morality are dependent.
Concerns regarding criminal cost also influence the possibility of committing crime.
8 J.-j. Chang, C.-H. Wu

Crime is influenced by legal norms, e.g. the probability of detection and the severity of
sanctions, as addressed by Becker (1968). We established an exogenous worker crime
rate in the model; that is, under conditions in which the gain from crime is great
enough, a fixed number of workers will commit crimes.4

The Wage Bargain

In line with the generality of the model, the Nash bargain solution was used to deal with
the negotiation between workers and employers. That is, both parties negotiate over
wages. Let be the bargaining power between workers and firms and (0, 1). The
optimized bargaining negotiation must satisfy:

Ue  Uu o  v ; 11
1

where o is the marginal value of occupied jobs in a given firm, whereas v is the
marginal value of vacant jobs. Furthermore, o and v evolve under the ensuing
asset equation:
o MPL  w d 1 fv  o ; 12

v S vv  o ; 13
where MPL is the marginal product of labor (for new workers), therefore MPL0y/l.
The representative firm has a probability of each vacancy being filled as (v)0l(v)/v.
Moreover, S is the loss caused by the job vacancy than cannot be filled (or the
vacancy cost of the firm). For simplicity, we assumed S0sy.5 To better match the
reality, we let v 00. The firm cannot gain additional value if the vacancy cannot be
filled. By (12) and (13), we obtained the optimal number of job vacancies in the labor
market:

syv MPL  w
14a
l d1f

Equation (14a) implies a zero-profit condition under free entry of firms. Or

v vl; w; ; d 1 ; f; s: 14b
To present a simple and clear description of the impact of crime on the employ-
ment market and economic growth, we assumed that the crime rate of all workers was
identical, so that 1020. The case of differing crime rates between employed and

4
See Burdett et al. (2004) for exogenous crime rate. Accordingly, criminals commit crime in the
neighborhood rather than where they reside; therefore, the exogenously determined crime rate in private
areas is rational. Given that, if illegal gain exceeds legal income, i.e. G > maxfW  T ; B  T g, then crime
rates 0 and 1 exceed zero.
5
In this paper, we assumed that the firm needs not pay advertising costs for vacancies, therefore it has an
incentive to fill each vacancy until profit is optimized.
Crime, Job Searches, and Economic Growth 9

unemployed workers is discussed in the extension. By substituting 1020 and (6)

(10) and (12)(13) to (11), the bargaining wage function led to:

df l
wB MPL  w: 15
1  df
The standard wage is determined through negotiation in terms of the number of job
vacancies in a firm and the number of unemployed job seekers. To determine the
ongoing growth rate, we set unemployment subsidies and wages in fixed proportions as
B0bw and 0b<1 where b is the replacement ratio in the endogenous growth model.
For the same reason, we specified illegal income G and convict benefits Z as G0gw
and Z0zw where g is illegal income-wage ratio and z is benefit-wage ratio of convicts.
1a
Substituting B0bw and MPL bAk k a l b1 to (15), we rewrote the equilibrium
wage equation:
1a

w bAk k a l b1 by=l w k; k; l; ; ; f; d ; 16

dfl
where 1b1dfdfl , and >0, b >0, <0, <0, <0
and v >0.

Households

A representative household in the economy has an instantaneous CRRA utility

function where 1/ is the fixed elasticity of intertemporal substitution ( is the rate
of intertemporal substitution) through choosing consumption c to maximize the
discounted sum of future instantaneous utility. The optimization problem of the
household is
Z 1
c1  1 t
max e dt; 17
0 1
The revenue of the household is derived from three sources: (1) capital return rk
for holding real capital per term, (2) the profit transferred from firms, and (3)
personal income (wages, unemployment subsidies, and convict benefits). Let the unit
of aggregate labor force be 1, as the labor market determines the amount of employment
l and the crime market determines the number of prisoner n, workers have probability
l to be employed and receive wage w. In addition, they have probability n to be jailed,
and receive convict benefits Z. Finally, they have probability 1nl to be unemployed
and receive unemployment subsidies B. At this rate, the household has the expected
income from labor of wl B1  n  l nZ per term. We followed the ideas of the
labor market in terms of Van der Ploeg (1987), Palokangas (1996), and Lingens
(2002). From a macro view, the probability of households is equivalent to the number
of labor market (employed and unemployed) and crime market (prisoners). Accordingly,
let d be the capital depreciation rate. The budget constraint of the household is:


s:t: k p rk Wl B1  n  l nZ  T  c  dk ; 18
10 J.-j. Chang, C.-H. Wu

From (17) and (18), the current-value Hamiltonian function is given by:

c1  1
H " p rk Wl B1  n  l nZ  T  c  dk ; 19
1

where is a co-state variable interpreted as the shadow price. The optimal first-order
condition of households is:

c  " 0; 20a


k p rk Wl B1  n  l nZ  T  c  dk; 20b

" r  d  " " : 20c

By (20a) and (20c), we have Keynes-Ramsey rule or Euler equation as follows:

c 1
r   d : 21
c

Equation (21) indicates that the real consumption growth rate increases
(decreases) as the net return of marginal capital rd exceeds (fails to exceed) time
preference .

The Government and Resource Constraints

In light of the preceding discussion, the number of unemployed workers in the labor
market is 1nl; the number of convicts in the crime market is n. Consequently,
we can differentiate between government expenditures on unemployment benefits
B(1nl), transfer payments for the domestic needs of convicts nZ and costs paid for
the detection of crime. For simplicity, let the cost be Q()0qy increasing progres-
sively in terms of the advanced audit ratio so that Q 0qy>0. The government
finances the expenditures by collecting lump-sum tax. Thus, the governments budget
constraint can be:

T B1  n  l nZ qfy; 22

By integrating the budgetary constraints of the government (22), budgetary con-

straints of the households (18), the production function of firms (1) and the profit
function (2), we have the resource constraint of the economy as:

k 1  qfy  c  dk; 23

This shows that the production of the economy is held as accumulated real capital
by deducting expenditures due to real consumption, the cost of crime detection, and
capital depreciation, saving the residual.
Crime, Job Searches, and Economic Growth 11

Equilibrium and Economic Growth

In equilibrium, the average capital stock of all firms k is equivalent to that of

individual firms so that k k. By rearranging (1)(5), (14a), (16) and (21)(23),
we summarize the equilibrium conditions of economy as follows:
ay
r aAl b ; 24
k

w  bAl b1 k wl; k; v; ; ; f; d; b; 25

p 1  a  bAl b ; 26

lvv
l l v; ; d; f; 27
df

df
n nd; f; y ; 28
y df

syv MPL  w
; 29
l df

T B1  n  l nZ qfy; 30


k 1  qfy  c  dk; 31

c 1

aAl b   d : 32
c

This paper focuses on how actions in the crime market influence the employment
market; therefore, we collate the interaction between the labor market and crime
market as Proposition 1.

Proposition 1 An increase in the average crime rate in the economy or a high

probability of detecting crime leads to a decrease in the employment rate in the labor
market due to a reduction in the number of vacancies offered by firms.

Proof Using (25), (27) and (29), we can solve the instantaneous relationship of
equilibrium employment el:
e
l e
l ; b; s; ; d; f; b; 33
12 J.-j. Chang, C.-H. Wu

where el < 0, elb < 0, els < 0, el < 0, elf del < 0,and eld fel < 0. First, enhanced
bargaining power or an increase in unemployment benefits has a detrimental effect
on employment because they both increase the cost of employing new workers,
thereby decreasing the willingness to provide job vacancies. Consequently, vacancies
in the labor market decrease, leading to a reduction in employment in equilibrium. On
the contrary, as the vacancy cost s falls, an increase in the vacancies in the labor
market promotes employment. When the probability of detecting crime or the crime
rate rises, two contrary effects occur. First, it increases the uncertainty of firms
being able to produce goods. In other words, a high probability of workers being sent
to jail decreases the number of vacancies. On the other hand, Eq. (25) shows that the
preceding changes reduce the equilibrium wage allowing the firms to provide more
vacancies, leading to an increase in employment and an improvement if the options
open to workers. Furthermore, the beneficial effects are less than the detrimental
effects for vw wi vi < 0 and i0, .
Hence, an increase in the probability of detecting crime with a crime rate equals to
the reduction in the number of vacancies in the labor market lead to a decline in
employment, in equilibrium.

Balanced Growth Rate

By substituting the Keynes-Ramsey rule (19a) into the aggregate resource constraint
(21), the growth rate of the dynamic system is presented by:
c 1
g c aAel b   d; 34
c


k c
g k 1  qfAel b   d: 35
k k
To have an equilibrium in the economic growth rate, in light of the insights
provided by Barro and Sala-i-Martin (1995), we defined xc/k as the real
consumption-capital ratio. In equilibrium, consumption c and capital k both grow at
rate g thus g c0g k0g. The dynamic system is transformed by the real consumption-
capital ratio x:

x c k h a i d
  1  qf Ael b x d  : 36
x c k

Before discussing the effect of policy on growth rate, we have to understand the
stability of the macroeconomic system; that is, we have to discuss whether unique
convergent path of balanced-growth-path (BGP) exists. As addressed by Benhabib
and Farmer (1994), a balance in local indeterminacy (infinite balanced paths con-
verge to a long-term equilibrium) is the source of endogenous prosperity. To ensure
the existence and uniqueness of BGP and dynamic properties, we have the following
proposition.
Crime, Job Searches, and Economic Growth 13

Proposition 2 A unique balanced-growth equilibrium exists in which the growth rate

is g 1 aAel b   d and the dynamic equilibrium is locally determinate.

Proof Under steady-growth equilibrium, all endogenous variables grow at the same

balanced-growth rate in the temporal process, therefore we know c k =k 0; i.e.

upon x 0 and ex is the steady-growth equilibrium. In such a situation, long-term
equilibrium value ex can be derived from x 0:
d ha i
xe d  1  qf Ael b ; 37

where el el ; b; s; ; d; f has no effect by ex. Therefore, under conditions in which
the labor market determines the balance in employment in a stable-state economy,
there is a unique solution to the consumption-capital ratio.

To determine the dynamic properties, we conducted partial differentiation on ex by

(36) to obtain:

@ x=x
D 1 > 0: 38
@x
Given the transfer variable ex as the jump variable, the dynamic equilibrium is
locally determinate if D>0. Hence, there exists a uniqueness and stable convergent
equilibrium path.

Equilibrium Unemployment Rate

Given the effective labor force 1n, i.e. the convicts are excluded from the effective
labor force, therefore the unemployment rate is defined as:
1nl
u : 39
1n
By substituting (28) and (33) into (39), the equilibrium unemployment rate is
rewritten as:
e
ue
u; b; s; ; d; f; y ; 40

where e u el =1  n > 0, eub elb =1  n > 0, e

us els =1  n > 0, e
u
h i h i
e
l =1  n > 0, e e e 2>
uf  l f 1  n nfel =
ud  l d 1  n nd l =1  n < 0, e e

1  n 2 > uy nyel=1  n2 > 0.

< 0, and e
Equation (40) shows some interesting effects of unemployment rate which is
collated as Proposition 3.

Proposition 3 Where the effective labor force is endogenized via a job search
and the choice to enter crime, with the same crime rate between employed and
unemployed workers, a high crime rate may help to improve the unemployment
rate.
14 J.-j. Chang, C.-H. Wu

Proof The effect of an increase in the crime rate consists of two components. First,
(5a) shows that the effective labor force declines in terms of the outflow of labor as
the increase in the crime rate elevates the number of convicts. On the other hand, (33)
indicates that the unemployment rate increases in terms of the number of employed as
reduced by an increase in the crime rate. To sum up, the relatively large effect of the
former leads to a low unemployment rate due to an increase in the crime rate. The
outcome is shown as:
h i.
ud  el d 1  n ndel 1  n2 >
e e e>
< 0 if ld 1  n nd l < 0: 41

Equation (41) shows that unemployment and crime rates could be either
procyclical or countercyclical; accordingly, a high crime rate may alleviate unemploy-
ment issues as the effective labor force is endogenized by the system.
Equation (40) also points out that an increase in bargaining power , unemployment
subsidies b, vacancy costs s and job destruction rate makes unemployment worse.
The preceding changes reduce the number of vacancies in the labor market with a
further detrimental effect on employment, showing compliance with traditional
economic theory related to labor.
In the crime market, the advanced release rate y has a negative effect on unemploy-
ment in the labor market, due to an increase in the number of unemployed workers
returning to the employment pool from jail. On the other hand, taking the endogenous
effective labor force into account, we determined that the impact of an increase in the
probability of detecting crime has an uncertain effect on the unemployment rate.
Likewise, an increase in the probability of detecting crime also leads to two different
outcomes. The effects can be expressed as follow:
h i.
uf  el f 1  n nfel 1  n2 >
e e e>
< 0 if lf 1  n nf l < 0: 42

Next, we explore the impact of diverse factors on growth rate. First, the equilibrium
growth rate is derived from (23) and (28):
e
g e
g d; ; b; s; ; d; f; 43

where e
gd 1
< 0, e
g ab
Ael b1el < 0, e
gb ab
Ael b1elb < 0, e
gs ab
Ael b1els < 0,
e
g ab
Ael b1el < 0, e
gd ab
Ael b1eld < 0, and e
gf ab
Ael b1elf < 0.

By comparing (40) and (39), it is observed that the relationship between the
unemployment rate and the growth rate remains uncertain, which differs from the
literature on general endogenous growth. In this study, once the labor market was
influenced by crime, the relationship between unemployment and growth rates are
also influenced. Thus, we have the perspective as below:

Proposition 4 When employed and unemployed workers are equally likely to commit
crime, then
(1) In the case of a situation with a high crime rate, the high number of convicts
leads to the a decrease in the number of individuals in the employment pool,
Crime, Job Searches, and Economic Growth 15

therefore the unemployment and growth rates are procyclical with an increase in
crime rate if the reduction in the effective labor force is sufficiently great.
(2) In the low crime rate case, the detrimental effects of an increase in the crime rate
on employment is dominant; therefore, unemployment and growth rates are
countercyclical as the crime rate increases.

Proof In line with (39a) and (43), in the case eld 1  n ndel > 0, the relationship
between unemployment rates and the growth rate and crime rate is:
ab eb1e h i
e
gd Al ld < 0 and e ud  el d 1  n ndel =1  n2 < 0:

Whereas in the case eld 1  n ndel < 0, we can show that

ab eb1e h i
e
gd Al ld < 0 and e ud  el d 1  n ndel =1  n2 > 0:

If the decline in the effective labor force is a dominant factor, nd > eld 1  n=el,
the high crime rate simultaneously reduces the unemployment rate and growth rate.
On the contrary, if the decline in employment is a dominant factor, unemployment
and growth rates are countercyclical with an increase in the crime rate.
Also, under (40) and (39), an increase in bargaining power , replacement ratio b,
search cost per output s and job destruction ratio result in a countercyclical
relationship between the unemployment rate and growth rate.

Extensions

In general, the literature dealing with crime recognizes that the crime rate of unem-
ployed workers is greater than that of employed workers, due to the elevated number
of options or reduced opportunity cost of unemployed workers with regard to illegal
activities. Despite the apparent impact of the crime rate on the unemployment rate and
growth rate, this analysis not only questions its effect on society as a whole, but also
explores the adverse effects triggered various elements of crime. We assumed
that the crime rate among unemployed individuals exceeds that of the employed
so that 0>1. In such a situation, the instantaneous relationship of employment time
l is derived:
l l ; f; d 0 ; d 1 ; ; y; b; g; z; 44
where l d1 >
< 0; l d 0 < 0; l g > 0; l z > 0; and l y > 0. Equation (44) demonstrates that an
increase in the crime rate among the unemployed has a detrimental effect on
employment. When confronted with a high crime rate among the unemployed, firms
are less willing to offer job vacancies; therefore, a reduction in the number of
vacancies in the labor market further decreases the equilibrium of labor. On the
contrary, an increase in the crime rate among the employed increases the uncertainty
felt by firms; at this rate, the job vacancy may increase to avoid loss, leading to the
advanced equilibrium labor.
16 J.-j. Chang, C.-H. Wu

To discuss the relationship between crime and the employment market, we obtain
the equilibrium unemployment rate of effective labor force u by (5), (28) and (44):
u u; f; d 0 ; d 1 ; ; y; b; g; z; 45
 
where ui  1  n nl l i ni l =1  n2 > < 0; 8i d 0 ; d 1 ; y; g; z. Utilizing (23)
and (28), the equilibrium growth rate can be derived as:
g g ; f; d 0 ; d 1 ; ; y; b; g; z; 46
where g d0 abAl l d 0 < 0 and g d1 abAl
b1 b1
ifld1 >
<0 ld1 >
< 0.
Via (45) and (46), we
have the explanations as follows. An increase in the crime rate among unemployed
workers leads to a reduction in the growth rate with an increase in the unemployment
rate in the economy, i.e. the unemployment rate, and growth rate are countercyclical.
However, it is interesting to note that the impact of the effect of an increase in the
crime rate among employed workers on unemployment rates and growth rate remains
uncertain. Such a result differs from the conventional idea that the crime rate
definitely reduces growth rate.
For a clearer expression of the preceding results, we conducted a simulation using
the parameters found in Table 1. This provided totally different results for crime of
diverse origins as shown in Fig. 1a and b. Where it is assumed that the crime rate of
unemployed workers exceeds that of employed workers, the unemployment rate
increases and the growth rate gradually decreases in terms of the crime rate among
unemployed workers from 0.3 to 0.42 as shown in Fig. 1a. In Fig. 1b, where the crime
rate among employed workers rose from 0.12 to 0.3, the unemployment rate gradually
fell and the growth rate rose in the economy under the parameters. To give the economic
intuition, from (16), it shows that the rise of workers crime rate will reduce the
equilibrium wage allowing the firms to provide more vacancies, leading to an

Table 1 Benchmark economy

Benchmark economy,

capital shares 0.36

labor share 0.08
bargaining power 0.5
0 crime rate among unemployed workers 0.3
1 crime rate among employed workers 0.1
1/ is the intertemporal elasticity of substitution 1
the rate of time preference 0.2
job destruction rate 0.05
s vacant job cost 0.1
b unemployment benefit-wage ratio 0.5
d the rate of depreciation of the capital 0.6
g illegal income-wage ratio 1.25
z benefit-wage ratio of convicts 0.2
< release rates 0.3
the probability of being sent to jail 0.09
Crime, Job Searches, and Economic Growth 17

unemployment rate

economic growth rate

b
economic growth rate

unemployment rate

1
Fig. 1 a Increase in the crime rate among unemployed workers (0). b Increase in the crime rate among
employed workers (1)

increase in employment and an improvement. On the contrary, the effect of the

increase in the crime rate among unemployed workers has lack on the vacancy.
And from (4), another direct effect will lower number of workers. If the positive
effect of vacancy is bigger than the negative effect of employment, such as parameters in
the last case, the workers crime rate will help to improve unemployment and promote
economic growth.

Concluding Remarks

There is no consistency in the literature addressing the impact of crime on the labor
market or on the aggregate effect of economic growth. Regarding the relationship
between the unemployment rate and crime rate as stated by Orsagh and Witte (1981),
the problems result from the random settings in the model revealed through an
18 J.-j. Chang, C.-H. Wu

analysis of the economic decisions using macro data in the micro model. It is not
surprising to obtain inconsistent conclusions. This paper proposes a rational
job-search model describing a plausible labor market with regard to crime and
jobs. In addition, unlike the literature, a macro endogenous growth model was
established to discuss the relationship between the unemployment rate and
growth rate as they pertain to crime.
Crime arises from the moral decisions made by individuals, and economic
perspectives state that the concerns for cost associated with crime influence the
likelihood of crimes being committed. According to Becker (1968), crimes are
influenced by legal norms in the economy, such as the probability of detecting crimes
and the severity of sanctions. We focus on the impact of macro crime on a macro
economy; therefore, the crime rate is exogenous, established as the average proba-
bility. In such a situation, our concluding remarks are as follows. First, there exists
only a locally determinate average growth path in the equilibrium of an economy. An
increase in the crime rate in the economy damages the labor stock. However, the
change could help to improve the unemployment rate in terms of effective labor
force. Second, in countries with extremely high crime rates, the unemployment rate
and growth rate are procyclical in terms of crime rate. Otherwise, the relationship
between the two is negatively correlated, as addressed in the literature. Finally, to
differentiate the various origins of crime, we assumed that the crime rate among the
unemployed was higher, in compliance with conventional perspectives in which the
cost of crime among the unemployed is lower. An increase in the crime rate among
the unemployed has a negative influence on the unemployment rate and growth rate.
Nonetheless, an increase in the crime rate among employed workers might help
to improve unemployment and promote economic growth.

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