Education and Correctional Spending in the United States

By
Jordan Bolan
POS 3930
Department of Political Science
Florida State University

Introduction
When a state spends more on education will that state be able to prevent criminal activity and,
therefore, be able to spend less on corrections?
I want to address the relationship between educational spending and correctional spending in
state budgets. Education spending is of growing national concern and affects the nations
economy. By studying the relationship between education and corrections, researchers can help
shed light on the social and economic influences of education and, therefore, help shape
education policy with a greater understanding of the policys potential effects. I will be studying
the effect of education spending in the state, the independent variable, on the states crime
expenditures ten years after the education spending was observed, the dependent variable. This
way I can observe education spendings impact on correctional spending when those students
reach the age where they could enter the correctional system.
Leading economic studies by Lochner emphasize the influence of education on criminal activity,
they focus on the relationship between education and decreased criminal activity by evaluating
the increasing opportunity cost of incarceration time as the individuals education, and therefore
wages, increase (2004). Lochner and Moretti (2004) did a study together, which accepts that
those citizens with increased educations have increased wages, to explain that increased wages
create an incentive to stay in the work force and not spend time incarcerated. Also, it is noted
that education can affect the patience or risk aversion of individuals, making them more likely to
see the value of the low risk income that they will receive if they stay in the work force as
opposed to criminal activity. Their research returned results strongly indicating that education
reduced incarceration levels (Lochner and Moretti 2004).

Lochner and many others have set up the theoretical framework that many, especially
economists, use to review the relationship between education and crime. Machin, Marie, and
Vujic observed the different crimes rate between individuals who attended school before and
after the compulsory school age was raised in England and Wales. They used a similar
theoretical approach to explain their causal mechanism: that, education increased the cost of
imprisonment, and educated individuals have increased risk aversion. The authors observed that
education reduces property crime and concluded that education has great social benefits (2011).
Machin teamed up with Meghir in another study which built off of Groggers work on the
relationship between Market Wages and Youth Crime (1998), and observed that labor market
incentives have a negative relationship with crime. Both articles argue and support their theses
that citizens consider real wages, attainable through education, as an incentive to refrain from
criminal activity (Machin and Meghir 2004).
Ehlich (1975) directly addressed the correlation between education and crime and similarly
concluded that those with less schooling are more inclined to commit crimes against property.
The article also suggests that for the income inequality in the states is another variable affecting
crime rates, a confounder that I will address through evaluating the salaries and wages in the
states. Beckett and Westerns research on welfare and the penal system also establishes other
potential confounders: poverty rates, welfare, and urban populations (2001). Many of the
economic articles I have reviewed mainly attempt to discern the degree, to which education
affects criminal activity. My study will further consider the relationship between education and
crime, by assessing the aggregate relationship between the states education spending and
correctional spending. This analysis of expenditure effects will help to identify the monetary
value of the social benefits of education, specifically in preventing crime.
3

Theory and Hypothesis

Education is an important part of our society. The better the education a student gets the more
that individual is likely to succeed and enter a valuable role in society. Educated people are more
likely to help grow the economy by taking on careers that keep the market functioning, and as
Machin, Marie, and Vuji (2011,464 ) argue in their research, improving education can not only
yield sizable social benefits but also act as a key policy tool in the drive to reduce crime. As
more individuals are educated properly, the society and economy will grow. Investing in
education will result in students being able to learn vital knowledge and skills that will allow
them to be more successful adults.
States that help their citizens obtain a better education promote higher income levels among their
citizenry. Individuals who achieve a higher education level are able to make higher wages, and
those higher wages, as Grogger (1989) and many after him argue, will have a great effect on
whether individuals decide to enter into or avoid criminal activity. Economic reasoning, what
Lochner termed the Human Capital Approach to educations relationship with crime, suggests
that people respond to the incentive of wages, and if individuals see the opportunity costs of
entering the penal system as too high, they will be deterred from committing crimes. Those who
are able to make better wages because their education gives them social opportunities will be less
likely to commit crimes, as their time is more valuable to them (Lochner 2004). Those
individuals are not going to want to commit crimes that are going to cost them time in prison, as
they will be losing a great deal more money in the form of lost wages than those of a similar
background who did not receive the same level of education.

Many people commit crimes for economic reasons. Those who are not able to retain a job or are
not achieving a salary needed to maintain their standard of living will be driven to criminal
activities due to their economic hardship, as Ehlichs (1975) studies have shown. Those
individuals who are able to attain more education are far less likely to be driven to crime. When a
school is better financed it will be able to support its students better, and those students, through
their education, will develop a greater amount of patience and risk aversion. The individuals who
invested time into their education are more likely to value their time and have a long term frame
of thinking. They are more likely to be patient in their investment of time, and want to avoid
taking actions that risk the foundation they have built and all the future rewards they could reap
from their skills. Therefore, those students who received a better education, who developed
patience, risk aversion, and skills, are far less likely to enter into criminal activity, as they will
not want to jeopardize the salaries they could earn. When a state emphasizes spending on
education, it can prevent criminal activity, property and violent, in its populace as an education
will alter the value a citizen places on the financial or psychic rewards from crime itself,
making it far more beneficial for the citizen to avoid criminal activity (Lochner and Moretti
(2004), 156).
State Governments have to fund both education and corrections. Educational funding promotes
students to develop and become more aware, involved citizens. The research of indicates that
when more funding goes to education, students enter the market making higher salaries
(Acemoglu and Angrist (2001)). The more equipped students are for the job market, the better
salary those individuals will achieve in the future. As Machin and Meghir (2004) argue,
individuals earning higher wages are not as likely to have a need or desire to commit a crime.
The more states spend on education, the less crime will be committed in the future. As students
5

who receive a quality education grow into adulthood, more will enter the job market than the
penal system. When fewer crimes are committed in a state, that state saves money on
correctional programs. Therefore, states that spend more on education will be able to spend less
on corrections in the future.
Analysis
Data Source, Variables, Research Design
I am using data that provides the state level finances and spending for all fifty states from the
years 1977 to 2010. My focal independent variable is elementary education spending, my
dependent variable is correctional spending, and my other independent variables are state
revenue, salaries and wages, states public welfare spending, and the states unemployment
spending. Each of my variables is set to be per capita to real dollars in 2012 to account for
inflation. Since I have such a large cross-sectional dataset available to me I have the ability to
test the relationship between states spending priorities through decades and across the nation.
My dependent variable is the correctional expenditures of the states each year, per capita,
adjusted for inflation. The central relationship I am assessing is the effect of a states education
spending on correctional spending in that same state ten years down the road. I am using the
states total elementary expenditures, per capita, adjusted for inflation, to measure the
independent variable. By taking into account the spending per pupil, I am able to adjust for
school population, and average out the spending in a variety of areas. In order to properly assess
the relationship between education spending and correctional spending I had to acknowledge that
the correctional spending would not be affected by education spending until at least a decade had
passed, as the education expenditures that affected students that were say 8 years old were not
6

likely to enter the penal system for another decade. To account for this, I created a new, lag
variable to measure educational spending that had occurred ten years prior to correctional
spending being evaluated. This measurement allows for the study of correctional spending as it
relates to education spending 10 years prior, so that the relationship between education
expenditures and correctional expenditures can properly be evaluated, as it is a relationship with
a development period. For a visualization of the dependent variables disbursement refer to the
histogram below:

Each of my control variables: state revenue, salaries and wages, states public welfare spending,
and the states unemployment spending are measured per capita, and adjusted for inflation for
each state and for each year from 1977-2010. With the state revenue variable I am able to control
for the states economy and size, and how that would affect spending. Salaries and wages is an

average in the state and allows me to control for the economic outlook in each of the states
through the years as that can influence the amount of crime committed. The public welfare
expenditures variable was chosen to account for how supportive the state was to welfare, which
7

will account as a possible confounder as states that spend more on welfare may also spend more
on education and spend less on correctional spending and may account to some degree why
crime may occur in those economic situations. Unemployment spending is taken into account as
it, like the previous variables, provides another confounder on why citizens may be pushed to
unlawful acts, because as my theory indicates, the economic environment has a great effect on
the populaces propensity for committing a crime. Each of my confounders was chosen to best
account for the other explanations for each states correctional budget and also as they may be
highly correlated to education spending.
Results
Panel Corrected Standard Error Results
Independent Variables
Coefficients
Education (10 years prior) -.0404***
States Revenue
.0013
Salaries and Wages
.1190**
Public Welfare
.0107
Unemployment Comp.
.0056
Cons
-56.28**
R-squared = 0.5908
** p<.01* p<.05**

z result
-3.04
0.65
9.60
1.55
0.26
0.00

I used a model with panel corrected standard errors (PCSE) estimate with my pooled, crosssectional time series data. By choosing to run a PCSE model I avoided the heterogeneity of a
simpler OLS model, which could have yielded me inaccurately low standard errors and rejecting
he null would have been simple with inflated significance results. The PCSE model results, seen
above, had an R-squared of 0.5908, indicating that the model accounts for fifty-nine percent of
the variation in the dependent variable. For my independent variable, education spending, I got a
statistically significant result of -0.04036. This indicates that for every unit increase in education
spending ten years prior to the year observed there is a -0.04036 unit decrease in the thousands of
dollars spent on correctional costs in that state. This negative result aligns with my hypothesis on
8

the negative relationship between education spending and subsequent correctional spending, that
greater education spending would result in the need for less correctional spending in the future.
While the effect of education spending on corrections spending was not exceptionally large, it
does indicate in this model that there is an effect, one that could shed light on policy decisions
for education funding.
The other independent variables deviate from what I had expected with my hypothesis, as they
all had a positive effect on my dependent variable. None of the independents variables had
particularly strong effects on the correctional spending, with the highest effect being salaries and
wages with a coefficient at 0.119, indicating a 0.119 increase in thousands of dollars in
corrections per unit increase in education spending. The only independent variables that proved
to be statistically significant, marked by their low p-values, were salaries and wages and
education spending.
In order to further analyze my data and account for more variation in the states I ran a fixed
effects model. This model yielded results that helped me understand the relationship while each
states unique effects are taken into account across the years.
Fixed Effects Results
Independent Variables
Education (10 years prior)
States Revenue
Salaries and Wages
Public Welfare
Unemployment Comp.
Cons
R-squared = -158.90
** p<.01* p<.05**

Coefficients
.0334**
.0021
.0951**
.0052
-.0253
-56.28**

z result
3.04
0.91
6.31
-0.48
-0.95
-5.88

The results, above, tell a different story than my PCSE model. This fixed effects model resulted
in my focal variable, education spending, having the opposite effect I had hypothesized, with a
9

coefficient of 0.0334. This positive number indicates that for an increase in education spending
there is an increase in correctional spending in that state ten years in the future, this validates the
null hypothesis, and is even statistically significant with a p-value of .002. This relationship is
illustrated in a graph accounting for marginal effects presented here.
As education spending increases there is an increase in correctional expenditures, indicating that
my hypothesis is incorrect.

Conclusion
The results of my panel corrected
standard errors model for my focal
relationship do align with what I had
hypothesized, that as education
spending increased, there would be a
decrease in correctional spending.
However, the effect is not quite
substantial in that a mere 0.0404
change per unit is not enough to support any policy changes. My theory suggests that the main
reason that education decreases the likelihood of crime, and, therefore, correctional expenditures,
is due to the opportunity cost of losing wages, however, this was not upheld by the results from
my salaries and wages variable. That particular variable indicated a positive relationship that
goes against my theory. Having such a small negative effect on correctional expenditures, I am
10

not convinced that education spending is substantial enough, especially when compared
considering that after I ran a fixed effects model even a small negative effect did not exist. The
relationship between education and correctional expenditures can be studied further; perhaps
taking a more micro look at the relationship could shed more light on the correlations effect.

11

Works Cited
Acemoglu, Daron and Joshua Angrist. How Large are Human-Capital Externalities? Evidence
from Compulsory-Schooling Laws. NBER Macroeconomics Annual 2000, Volume 15
(2001): 9-74. http://www.nber.org/chapters/c11054
Lochner, Lance. "Education, Work, and Crime: A Human Capital Approach*." International
Economic Review 45.3 (2004): 811-43. http://onlinelibrary.wiley.com/doi/10.1111/j.00206598.2004.00288.x/pdf (February 3,2015)
Lochner, Lance and Enrico Moretti. "The Effect Of Education On Crime: Evidence From Prison
Inmates, Arrests, And Self-Reports," American Economic Review (2004): 155-189.
http://www.nber.org/papers/w8605 (February 3,2015)
Machin, Stephen, Olivier Marie, and Sunica Vuji. "The Crime Reducing Effect of
Education*." The Economic Journal 121.552 (2011): 463-84.
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2011.02430.x/epdf (February 27,
2015)
Machin, Stephen and Costas Meghir. Crime and Economic Incentives. The Journal of Human
Resources (2004): 958-979. Print.
Beckett, Katherine and Bruce Western. Governing Social Marginality: Welfare, Incarceration,
and the Transformation of State Policy. Punishment & Society (2001). 43-59. Print.
Ehrlich, Isaac. On the Relation between Education and Crime. Education, Income, and Human
Behavior (1975). 313- 338. http://www.nber.org/chapters/c3702 (February 20, 2015)
12

Grogger, Jeff. Market Wages and Youth Crime. Journal of Labor Economics, Vol 16, Issue 4.
(1998). 756-791. Print.

13

Tables
Histogram of Correctional Expenditures:

The graph above illustrates the marginal effects of my independent variable on the dependent.

14

The scatterplot below gives a good illustration of the trends of the correlation between the focal
independent variable and the dependent variable:

This graph highlights how though very low levels of education spending does produce a few
instances of high correctional spending, the general trend aligns with the null hypothesis.

500

1000

1500

Scatterplot with Fitted Line

1000

2000
corr_expen

3000
educ_10

4000

5000

Fitted values

15

Figures
Results from the panel corrected standard errors test:

The results on the following page are from the fixed effects model:

16

. . xi i.state_a
i.state_a
.
>

_Istate_a_1-52

. xtpcse corr_expen
te_a, pairwise

Number

of

gaps

in

Linear

regression,

Group variable:
Time variable:
Panels:
Autocorrelation:
Estimated
Estimated
Estimated

educ_10

sample:

tot_rev

(naturally

coded;

tot_salwag

tot_pubwelf

omitted)

tot_unempcomp

i.sta

102

correlated

panels

corrected

state_a
year
correlated (balanced)
no autocorrelation

covariances
autocorrelations
coefficients

_Istate_a_1

=
=
=

standard

errors

(PCSEs)

Number of obs
Number of groups
Obs per group: min
avg
max
R-squared
Wald chi2(28)
Prob > chi2

1326
0
56

Panel-corrected
Std. Err.

P>|z|

[95%

=
=
=
=
=
=
=
=

Conf.

1224
51
24
24
24
0.8075
72008.41
0.0000

corr_expen

Coef.

Interval]

educ_10
tot_rev
tot_salwag
tot_pubwelf
tot_unempcomp

.0334302
.0020605
.095134
-.0052312
-.0252605

.0109807
.0022748
.0155074
.0108997
.0265204

3.04
0.91
6.13
-0.48
-0.95

0.002
0.365
0.000
0.631
0.341

.0119085
-.0023979
.06474
-.0265943
-.0772395

.0549519
.006519
.125528
.0161319
.0267185

state_a
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
DC
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachuse~s
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampsh..
New Jersey
New Mexico
New York
North Caro..
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Caro..
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virgi..
Wisconsin
Wyoming

-103.0049
103.6171
49.2058
103.4604
43.01323
8.62318
235.2619
31.19672
116.6062
94.16886
-1.886136
55.07459
.5588243
20.86515
-45.91971
-23.27535
45.08679
61.12809
26.97164
90.86347
25.61095
69.21765
-50.36638
15.83991
26.29782
12.23176
-54.78187
141.804
14.6955
5.274038
63.63027
17.87819
49.09666
-61.88485
29.04189
39.64855
54.49401
91.3018
24.02941
34.84773
28.03115
62.99403
74.66839
26.06925
-32.57541
80.73064
13.1837
5.793728
46.80943
-47.75162

38.07747
7.290893
7.975793
10.56495
9.933085
10.6405
61.2244
15.90057
6.429202
4.691447
7.419745
7.683616
7.181986
4.875539
4.773624
9.060825
6.68724
9.487138
10.11199
6.16264
9.695265
7.915577
6.732469
6.078833
3.946616
11.27701
8.981346
7.236107
6.878999
12.15853
7.06119
17.48552
6.387611
5.486338
6.94829
7.215618
11.05574
10.37878
8.98369
5.503614
6.342313
6.904709
8.720342
7.837553
6.140578
8.152193
10.69528
8.702056
11.42
27.34565

-2.71
14.21
6.17
9.79
4.33
0.81
3.84
1.96
18.14
20.07
-0.25
7.17
0.08
4.28
-9.62
-2.57
6.74
6.44
2.67
14.74
2.64
8.74
-7.48
2.61
6.66
1.08
-6.10
19.60
2.14
0.43
9.01
1.02
7.69
-11.28
4.18
5.49
4.93
8.80
2.67
6.33
4.42
9.12
8.56
3.33
-5.30
9.90
1.23
0.67
4.10
-1.75

0.007
0.000
0.000
0.000
0.000
0.418
0.000
0.050
0.000
0.000
0.799
0.000
0.938
0.000
0.000
0.010
0.000
0.000
0.008
0.000
0.008
0.000
0.000
0.009
0.000
0.278
0.000
0.000
0.033
0.664
0.000
0.307
0.000
0.000
0.000
0.000
0.000
0.000
0.007
0.000
0.000
0.000
0.000
0.001
0.000
0.000
0.218
0.506
0.000
0.081

-177.6354
89.32723
33.57353
82.75344
23.54474
-12.23182
115.2643
.0321788
104.0052
84.97379
-16.42857
40.01498
-13.51761
11.30927
-55.27584
-41.03424
31.98004
42.53364
7.152494
78.78492
6.608578
53.7034
-63.56177
3.925615
18.56259
-9.87078
-72.38499
127.6215
1.21291
-18.55624
49.7906
-16.3928
36.57717
-72.63787
15.42349
25.5062
32.82516
70.95976
6.4217
24.06084
15.60044
49.46105
57.57683
10.70793
-44.61072
64.75263
-7.778668
-11.26199
24.42663
-101.3481

-28.37446
117.907
64.83807
124.1673
62.48172
29.47819
355.2596
62.36126
129.2072
103.3639
12.6563
70.1342
14.63526
30.42103
-36.56358
-5.516456
58.19354
79.72254
46.79078
102.942
44.61332
84.73189
-37.17098
27.7542
34.03304
34.3343
-37.17876
155.9865
28.17809
29.10432
77.46995
52.14919
61.61615
-51.13182
42.66028
53.7909
76.16287
111.6438
41.63712
45.63461
40.46185
76.52701
91.75994
41.43057
-20.5401
96.70864
34.14607
22.84944
69.19222
5.84487

_cons

-158.8959

27.01502

-5.88

0.000

-211.8444

-105.9474

17