Crime and the labor market: A search model with optimal contracts

This paper extends the Pissarides [Pissarides, Christopher A. Equilibrium Unemployment Theory. Cambridge: MIT (2000)] model of the labor market to include crime and punishment à la Becker [Becker, Gary S. “Crime and punishment: an economic approach.” Journal of Political Economy 76 (1968): 169–217]. 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 is to decrease crime, but is quantitatively small. Small wage subsidies reduce unemployment and crime rates of employed and unemployed workers, and raise 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.