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Labor Market Opportunities and Crime in Sweden the Importance of Individuals on the Margin

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Labor Market Opportunities and Crime in Sweden the Importance of Individuals on the Margin Labor market opportunities and crime in Sweden The importance of individuals on the margin Max Stenman Braarup Master thesis 1, 15 ECTS Master’s program in Economics / Master thesis 1, 15 ECTS Spring term 2020 Acknowledgement I would like to take the opportunity to thank my supervisor Katharina Jenderny at the department of Economics, Umea˚ University, for continuous support and guidance during the process of writing this thesis. Despite a shaky internet connection and a questionable microphone on my part, you managed to give valuable constructive criticism during this process. Abstract This thesis aims to examine the relationship between legal opportunities and crime rates in Swedish counties between 2000-2013. Even though this relationship has been estimated consistently in the last 10-15 years, this thesis contributes by study- ing the effects of legal opportunities for men with lower levels of education. This group is often over-represented in crime rates but has seldom been studied specif- ically in relation to crime. According to economic theory, less educated have a smaller opportunity cost of committing a crime compared to those with higher lev- els of education. This is confirmed by the results in this thesis, as increases in the unemployment level for non-college educated males have a larger effect on prop- erty crime rates than the population average unemployment level. As high levels of crime lead to large costs for a society, labor market- and educational programs may have indirect benefits from lower levels of crime. These benefits may be underes- timated if not examining individuals on the margin between the legal- and illegal sectors. Contents 1 Introduction 1 2 The connection between crime and the labor market 4 2.1 Labor market opportunities for individuals on the margin . .6 2.2 The issue with population averages . .7 3 Theoretical framework 7 3.1 Deriving the model . .8 3.2 Aggregating the model . .9 4 Econometric specification 11 4.1 Simultaneity bias and instrumental variable approach . 13 4.2 A possible sensitivity analysis . 14 5 Data 14 6 Results 18 6.1 Property crime . 18 6.2 Violent crime . 21 7 Discussion 22 7.1 Future research . 25 7.2 Concluding remarks . 25 A Full regression results with control variables i B Unemployment comparison by data source iv C Descriptive statistics v 1 Introduction Since the beginning of the 21st century until mid 2010s the number of people with low level of education in Sweden reduced but the unemployment level increased (SCB, 2016)1. Uneducated, men in particular, is a group often over-represented in crime par- ticipation (Freeman, 1996; Gould et al., 2002). The recent developments on the labor market for uneducated provides an excellent opportunity to analyze the relationship be- tween labor market opportunities for uneducated men and the number of crimes in Swe- den. The interest in jointly analyzing crime and the labor market can be traced back over 60 years and the literature is continuing to grow (Mustard, 2010). The early influ- ential work within the field such as Becker (1968) assumed crime was mainly driven by potential benefits and costs in the illegal sector. Ehrlich (1973) developed this theory to include opportunities in the legal sector. Lately, improvements in the literature have allowed researchers to consistently measure a relationship between the labor market and crime. Part of the progress originate from inclusion of labor market variables that matter for individuals on the margin between the legal and illegal sectors (Mustard, 2010). Sweden along with its Scandinavian neighbours has, regarding crime, been described as different from the rest of the countries in the EU. The reason being that Scandinavian countries are characterized by smaller prison populations and expertise present in the public debate. This is the case even though in Sweden criminology is one of the smallest social science disciplines (Estrada et al., 2012). Although Sweden is considered as pos- itively different, inhabitants are worried about crime as numbers show 40% are worried about the development of crime in society and 80% believe the crime rate has increased in the last three years (NCCP, 2019). Apart from a source of individual concern, crime is also costly. Individuals lose property and may have to spend money to retrieve it. Vic- tims of violence may be deprived of their income and need transfers to cover for it and 1Low level of education is in the study defined as at most pre secondary education 1 the public sector spends money to prevent and reduce crime (McCollister et al., 2010). If bad labor market opportunities increase crime rates, there may be indirect costs and benefits associated with labor market policies that should be considered. An increasing unemployment level generates expenses through public transfers but may also lead to indirect expenses through an increase in the crime rates (Edmark, 2005). Recognizing this, labor market policies aimed to reduce the unemployment level or improve the labor market opportunities in general, perhaps through higher wages or lower unemployment level, may come with additional benefits not directly associated with the labor market. The aim of this thesis is to examine how labor market opportunities for men with lower levels of education affect the number of crimes in Sweden, during a period categorized by a large variation in unemployment due to the economic crisis. It was early estab- lished in the literature that population averages such as the mean wage and the popula- tion unemployment level may fail to locate individuals on the margin between the legal and illegal sectors. However, other measures have seldom been applied in the litera- ture (Mustard, 2010). One exception is Gould et. al (2002) who find that increasing the wage for non-college educated men and decreasing the unemployment level for the same group also reduces crime. Machin and Maghir (2004) find similar evidence using wages at the bottom end of the wage distribution. Also in Sweden, the use of popula- tion averages rather than averages for groups or individuals on the margin is common practice. Gronqvist¨ (2011) however, use individual data on youth unemployment and find a robust and positive effect of youth unemployment on crime. Controlling for the timing of crimes (weekend/weekdays), he finds that unemployment increases the time to engage in crime. Nordin and Almen´ (2017) find that long-term unemployment has better explanatory power than population unemployment. This thesis contributes to the existing literature by examining labor market opportuni- 2 ties for men with different levels of education rather than opportunities for the average population. Studying groups potentially on the margin between the legal and illegal sec- tor can increase the evidence of the relationship between the labor market and crime. Further, learning to what extent labor market outlooks for uneducated men affect crime rates can produce insightful knowledge on how to design labor market policies. Not accounting for indirect costs and benefits stemming from crime when designing labor market programs may underestimate the total effects. Using data on Swedish counties over fourteen years this thesis show the effect of unemployment on property crime is larger when using the unemployment level by educational level compared to population averages. Further, income as a measure of labor market opportunities instead of wages is proven to be insufficient as the effect of income on different crimes are insignificant. The thesis is outlined as follows. Section 2 review some of the existing literature about the relationship between the labor market and crime. Section 3 establishes a simple theoretical framework and section 4 outlines the econometric specification and some potential issues regarding the estimation. Section 5 describes the various data sources and section 6 presents the results which are discussed in section 7. 3 2 The connection between crime and the labor market Early literature reviews concluded that there was a gap between theory and empirical evidence. Academics and policymakers agreed on the intuition that labor market oppor- tunities affect criminal behaviour, but it was unsupported by the empirical work (Piehl, 1998; Mustard, 2010). Lately, a new generation of research has been able to consistently measure relationships between labor markets and crime due several developments. Con- sidering crime varies across relatively small areas, the possibility to use less aggregated data has been of vast importance to the development. The possibility to collect longitu- dinal data has provided the ability to control for unobserved differences across regions to reduce omitted variable bias. Further, work dedicated to theoretically and empirically identify groups on the margin between the legal and illegal sector and the opportunities this particular group is facing has led to consistent evidence on the relationship between labor markets and criminal behaviour. Lastly, realizing limits in the data and potential problems such as reverse causality has increased the ability to control for the potentially biased estimates earlier studies produced (Mustard, 2010). Regarding empirical findings, Grogger (1998) discovers that young men respond to wage incentives and that the racial wage differential explains part of the difference in crime participation rates. Raphael and Winter-Ebmer (2001), using US state-level panel data over the period 1971-1997, find evidence that unemployment increases property crime rates. They cannot find the same evidence for violent crimes2. Focusing on non-college educated men in the US, Gould et al. (2002)3 find wages and unemployment affect crime and that wages explain more of the changes in crime rates than unemployment. Regarding estimates over their study period 1979-1997, they find the non-college wage 2This is a common result in the literature. Violent crime is unlike property crime, seldom motivated by economic reasons (Levit, 2004). 3This study was the first at its time to specifically focus on those, according to the authors, most likely to commit crimes.
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