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Economics of Crime in the U.S: Panel Data Analysis (1980-2014)

Working Paper · April 2016

DOI: 10.13140/RG.2.2.20630.96325

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 Economics of Crime in the U.S: Panel Data
Analysis (1980-2014)

Authors: Miral Elemary & Noha Elghandour

Under the supervision of Dr. Marwa El-Beltagy

Economics Masters Programme, FEPS, Cairo University

May 2016

Abstract

In this paper, the relationship between crime and economic variables is examined. Using U.S state
data of the highest ten states in property crime in 2012, we estimate the effect of four independent
variables on property related crime rate. We used Ordinary Least Squares method in our panel data
analysis for the data from 1980 to 2014. Negative relationship is found between crime and
unemployment which matches Cantor and Land findings in (1985) for short term crime trends of the
guardianship effect. Whereas a significant positive effect is shown by per capita real wages on crime
rate. Our estimates suggest that a substantial portion of the decline in property crime rates during this
period is attributable to the rise in the per capita real GDP and the decline in the high school dropout
rate.

Key words: Property crime, unemployment, real GDP, dropout rate, poverty rate

1
Table of Contents

1. Introduction........................................................................................................3

2. Literature Review ..............................................................................................4

2.1Economic Perspective ..................................................................................4
2.2Sociological Perspective ..............................................................................6
2.3Empirical Findings .......................................................................................9

3. Data and Methodology ...................................................................................14

4. Empirical Analysis ..........................................................................................16

5. Conclusions and Recommendations .............................................................24

6. References ........................................................................................................26

7. Appendix ..........................................................................................................29

2
1. Introduction

Economics of crime has been a noteworthy field of research, connecting economic conditions

of a nation to the behavior of criminals. Motives behind committing a crime are economic and

related to the psychological characteristics of the individuals who commit crimes; this is especially

significant for violent crimes. However, if empirics show that better economic conditions would

cause the general level of crimes to decline, then policy makers should bear this in mind. This

research aims to examine the relationship between crime and four variables; three are economic

variables and the fourth is related to human capital specifically education. Aiming to conduct a

strong empirical analysis, panel data over ten states were examined for an annual time period of 35

years from 1980 to 2014. Panel data over U.S states was conducted before, but no paper examined

these particular ten states in the most recent decades. These states were chosen because according

to the FBI’s report in 2012, they had the highest property crime rates. The states in order of the

highest property crime rate are: Washington, South Carolina, Arkansas, New Mexico, Louisiana,

Arizona, Alabama, Oklahoma, Georgia, and Texas. Based on Becker’s linear model of crime,

Ordinary Least Squares regression method was used and the estimation output was analyzed on the

disaggregate level to eliminate any doubt related to our findings.

Studying crime trends and its determinants engaged criminologists and economists for

decades due to mixed empirical results; mainly due to different directions in identifying the

hypothetical relationship between crime and unemployment. The contradictory conclusions of

related studies led researchers to establish “a consensus of doubt” regarding this relationship on

both empirical and theoretical bases; hence invited more academics to examine the truth behind this

relationship (Chiricos, 1987). Accordingly, our research aims to identify the missing link and thus

contribute to recent literature on the topic.

3
 The paper begins with the introduction in section (1) followed by theoretical and empirical

literature review in section (2). In section (3) a detailed description of the data and research

methodology is presented. Section (4) presents the estimation output along with the explanation of

the data analysis. Finally, section (5) is the conclusion of the paper along with recommendation for

further research.

2. Literature Review

A vast number of economists and sociologists focused their efforts to identify the relationship

between crime and the labor market. Merton (1938) was the first to explore the notion behind

committing crime by analyzing socio-cultural factors that disrupts the social structure. Agnew (1992)

refined Merton’s model to lay down the foundations of a general strain theory for studying crime.

However, the introduction of other theoretical models that showed better results in studying

delinquency led to the abandonment of such theory. Moreover, Fleisher (1963) theorized a positive

relationship between crime and unemployment rates, and called for further theoretical research to

confirm such hypothesis. However, the collinearity between taste and income variables reduced

income effects on crime for the model, and made it difficult to assert empirically the determinants of

delinquency.

2.1 Economic Perspective

From an economic point of view, Becker (1968) outlined an “economic” framework based on

the Rational Choice Theory that defines an optimality condition for illegal activities through

identifying marginal costs; social damage (D) and costs of apprehension and conviction (C) (i.e. law

enforcement expenditure), and marginal benefits; the probability of conviction (p) and the

4
punishment (f) per offense which explain why individuals prefer to spend time accumulating illegal

rather than legal income taking into consideration the leniency of the law enforcement. Thus, the

“market offense function” is

O = O (p, f, u),

where O is the criminal activity level, and u represents other variables such as income. Hence, the

higher the cost of punishment and the probability of conviction, the lower the criminal activity level.

Following Becker’s theory, Ehlrich (1973) introduced a clearer model for investigating the link

between crime and unemployment by adding the opportunity cost of time between legal and illegal

activities. Thus, the number of offenses are presented as a function of

O = O (p, f, u, wi, wj, π),

where u is the probability of an individual’s unemployment, wi and wj are his current earnings from

time i to j, and π denotes other variables. His theoretical model was backed up by empirical findings

that show a positive correlation between property crime and income inequality in the US from 1950

to 1960 using a Two-Stage Least Squares (2SLS) method. Thus, Ehlrich suggested that public

expenditure directed towards “equalizing training and income opportunities” rather than enforcing

law is better at crime deterrence. Further applications of the rational choice theory were implemented

afterwards, however; conclusions and results were found to be “inconsistent” and “weak” as

summarized and explained by Chiricos (1987). He reviewed the findings of 63 studies on the

Unemployment-Crime (U-C) relationship to show the flaws behind model specification and

measurement in these studies. Thus, asserting the relevancy of testing disaggregated over aggregated

or national-level data which does not reflect a significant relationship between crime and

5
unemployment. Furthermore, he suggested the implementation of other control variables related to

the value of work which might have more significance than unemployment rates on crime.

2.2 Sociological Perspective

From a sociological perspective, Cantor and Land (1985) developed a theoretical model that

took into consideration the casual relationship between crime and unemployment (guardianship/

opportunity effect), and the effects of the unemployment-rate fluctuations on crime (motivation

effect). The former suggests that high unemployment rates usually occur during economic

depressions, which already induce consumers to reduce consumption and spend more time at home;

thus protect it from theft. Hence, at such times, there is a negative relationship between crime and

unemployment. The latter effect is a refinement to the Rational Choice theory, in which the Cantor

and Land (CL) model explains the positive relationship between crime and unemployment due to

changes in unemployment after a lagged period of poverty and not as a direct effect.

The main reason behind developing such model is to fix the shortcomings of early theoretical

literature which proved to be weak and inconsistent with empirical findings. Cantor and Land (1985)

argued that other models considered only “reduced-form relationships”, rather than “structural

relationships”, as portrayed in Figure 1.

Despite the efficiency of the Cantor & Land (CL) model at explaining the theoretical-

empirical U-C puzzle, it was specifically criticized by several researchers. The works of Box

(1987), which included a number of empirical studies on the topic, supported Hale and Sabbagh’s

(1991) criticism of the CL model on both empirical and theoretical grounds by applying it for a

time-series analysis on England and Wales. The results showed no cointegration between crime and

unemployment, which allowed them to assert that the model is “statistically misspecified” for the

6
use of first differenced regression models with lag effects. Moreover, ignoring the impact of other

exogenous economic and deterrence variables limited the significance of their framework.

Figure 1: Path Effects of Unemployment on Crime

Notation: -- denotes structural relationships, - - - denotes reduced-form relationships

Source: Unemployment and Crime Rates in the Post-World War II United States:
A Theoretical and Empirical Analysis by David Cantor and Kenneth C. Land (1985)

The further adoption of the CL method, invited others for criticism and response. Brit (1997)

investigated the U-C relationship disparities according to age and trend. His findings indicate a random

behavior of crime trend that supports the seminal work of Cantor & Land. On one hand, Greenberg

(2001a) criticized their model for the same reasons and argued that the introduction of cointegration

solves the shortcomings of nonstationary time-series data for long-run relationships, which are

overlooked by the CL hypothesis. On the other hand, Paternoster & Bushway (2001) and Brit (2001)

replied on Greenberg’s criticism by questioning the appropriateness of testing the crime-unemployment

relationship with cointegration during crime rate fluctuations, and called for more cooperation between

economists and criminologists for tackling the U-C relationship. However; Greenberg (2001b) falsified

7
their claims and raised up several flaws in their methodological views. The ongoing quarrel on the

relevancy of the CL framework was resolved through the works of Arvanites & Defina (2006); by

recognizing business cycle fluctuations through modelling instead of first differencing, and the use of

panel data confirmed the eligibility of the motivation hypothesis for fluctuations in crime and

unemployment over the opportunity one.

Phillips & Land (2012) examined the same relationship using data on the largest 400 counties in

the United States from 1978 to 2005. They observed from the model outcomes that unemployment was

significantly affecting three property crimes; burglary, motor vehicle theft and larceny. Thus, they

conform with Arvanites & Defina’s findings and hence propose refinements to the CL model for better

accounting of the U-C relationship for property crime. They stressed the eligibility of the opportunity

effect (negative relationship between the unemployment level and crime rate fluctuations) with micro-

level disaggregated data, confirmed the insignificance of using first-differences for accounting the

lagged effect, and invited researchers for further investigation of criminal opportunity and motivation

effects for other crime types. Finally, Cook and Watson (2014) applied a cyclical approach to the CL

framework (by assuming motivation as “counter-cyclical” and opportunity as “procyclical”) while

considering other socio-economic variables rather than unemployment rates to support the CL structure,

which was statistically significant.

2.3 Empirical Findings

The gap between theoretical models and empirical findings in economic literature narrowed with

the efficiency of reporting crime and law enforcement related data, and better application of

econometric methods by avoiding earlier literature’s inaccuracies.

8
 Grogger (1998) developed a simple framework to explain the responsiveness of young males to

wage incentives using Gronau’s (1977) basic model for cross-sectional data obtained by the National

Longitudinal Survey of Youth (NLSY) in year 1979. His results showed the implications of wage

differentials and incentives on youth, and thus explaining wages as an opportunity cost for crime that

increases with age.

In addition to Chicros (1987) concerns of the use of aggregate data, Levitt (2001) called researchers

to abandon the use of national time-series approach when investigating U-C correlations for eliminating

omitted-variable bias and other measurement errors that are frequent. Therefore, he suggests the use of

disaggregated data approaches; such as panel, international or individual-level analysis. To support his

claim, he used U.S state level panel data from 1950 to 1990 to show that one percent change in

unemployment rates is translated into a direct 1 to 2 percent change in property crime rates and thus

remove fixed-effects. Moreover, the use of panel data control unobserved differences using higher

degrees of freedom and more data variations.

Another similar study conducted by Raphael and Winter-Ember (2001) used the U.S state level

panel data from 1971 to 1997. Using OLS regressions they estimated the effects of unemployment rates

on crime rates which was positive in case of property crimes. For every one percent decline in

unemployment, crime decreased by 1 to 5 percent. However, the results were contradicting for violent

crimes. Unemployment positively affected robbery and assault rates, but was negatively correlated with

murder and rape. Gould (2002) used OLS regression method for county-level sample of 705 counties

from 1979 to 1997 in the United States to account for the changes in crime trends on youth during that

period. His work emphasizes the role of wages as a proxy for labor market changes rather than

unemployment rates, although both were found to be significant.

9
 Other researchers used a search-equilibrium model to analyze the U-C correlations (Burdett et al,

2003; Huang et al, 2004). However, Huang et al (2004) incorporated the search-equilibrium model with

the human capital approach by determining the crime rate endogenously while accounting for human

capital costs of schooling and working for several equilibrium conditions. The Human Capital Approach

for crime was however developed by Lochner (2004) by examining the patterns of “age-crime and

education-crime relationships” to explain differences between less-skilled and white collar crimes with

increased human capital investment. He, thus, emphasizes the importance of education, training and

wage subsidies as better deterrence policies.

To overcome the endogeneity problem previously found by Raphael and Winter-Ember (2001)

in their research, Lin (2008) proposes a 2SLS estimation method that showed the relevancy of the

crime-unemployment relationship, unlike previous literature, in which unemployment rates were

found to explain 30 % of property crime changes in the US during the 1990s. Lin’s main concerns

were to show problems associated with OLS estimations by controlling for independent and

instrumental variables to avoid omitted-variable and simultaneity biases.

Yearwood and Koinis (2011) discussed the findings of the research studies around the

unemployment-crime correlation. They described the research results to be mixed, and various

according to the type of data used and the methodology used to analyze data. They were among

researchers who used different economic variables besides unemployment rates. They examined

economic and crime data for the specific state of New California from 1977 to 2007. First of all, among

the economic variables he used in the model, two of them were the most significant explanatory

variables of the aggregate property crime rates; ‘supplemental security income payments’ with β = 0.94

and the ‘average wage and salary disbursements’ with β = - 0.52. Both variables explained 38 percent

of the dependent variable variance. This finding is consistent with Cantor and Land’s (1985) motivation

10
hypothesis that claims that people resort to crime when the average wages and compensation are lower

and economic conditions are worse. Second, the direct relationship between property crime and

supplemental security income (SSI) payments is explained by the elderly and disabled’s increasing share

in population. As the SSI recipients increase, it will be easier to commit crime against the old and

disabled for being easy targets. Another economic variable used by the authors was the consumer price

index which, along with SSI receipts accounted for around 80% of the variance in reported robbery

crime rates positively. This shows that when prices increase, individuals need more money to buy the

same goods and services because the purchasing power declines. This is another economic motive

behind property crimes.

Apart from literature conducted on the United States, several authors presented the U-C

relationship in other countries which is regarded as a very valuable addition to explaining this

correlation. Naryan and Smyth (2004) examined the relationship between earnings and crime of

Australian youth from 1964 to 2001 by applying Granger Causality and Cointegration tests with a Vector

Error Correction Model (VECM) to explain different types of crime dynamics whether statistically

endogenous or exogenous with income and unemployment. Their conclusions show cointegration of

youth unemployment and earnings with fraud, homicide and motor vehicle theft; while robbery, serious

assault, stealing or break and enter show no significance on the short-term. Bunano (2006) conducted a

regional-panel study from 1993 to 2002 in Italy to account for the relationship between crime and

unemployment taking into consideration deterrence, demographic, characteristic and socioeconomic

variables. His results show insignificance between unemployment and crime on national-level, while

little significance appears on the regional-level for the Southern regions only.

Altindag (2012) focused on studying this relationship in Europe. Through gathering a consistent

set of panel data for 33 European counties from 1995 to 2003. He analyzed the unemployment effect on

11
the following independent variable; homicide, assault, rape, robbery, property crimes, larceny, burglary

and motor vehicle theft. The author decomposed the unemployment rate labor force shares of the

unemployed with primary and high education. It has been found that individuals with lower education

and unemployed are a significant determinant of the impact of the unemployment rate on crime. Among

Altindag’s main findings is that a one percent rise in unemployment rate lead to the increase in property

crimes by about 2% using OLS regression. Observing the same relationship OF empirical tests in the

international context, Maddah (2013) conducted a time series analysis on Iran’s economy for the period

(1979 – 2007). He added another variable to unemployment, which is income inequality and used co-

integration method to see the impact of both variables on crime. He found a direct significant impact of

both variables on crime with income inequality and unemployment coefficients of 2.14 and 9.3

respectively. He concludes that his study proves the theory of Becker in economic effects on crime level.

Bharadwaj (2014) used panel data over Indian states to test for the socio and economic indicators

in crime rate. Determining the dependent variable as the sum of burglary, larency, auto thefts and

robbery; he used OLS regression method for various independent variables. He found a positive and

significant relationship between number of people under poverty line and crime. Also referring to the

importance of education, regression results showed that a 10% increase in education expenditures led to

9.35% decrease in total property crime rate. Among his unexpected results was that the negative

relationship between unemployment and crime, where a 10 % increase in unemployment leads to a 0.4%

decline in total property crimes. However, he reasoned this to the guardianship (opportunity effect) as

found by Cohen (1981) and Cantor and Land (1985).

Khan et al (2015) examined the impact of education, unemployment, poverty and GDP on crime

rates using time-series data from 1972 to 2011 in Pakistan. Generally, there is a significant positive

effect between crime rates and unemployment. Higher education and crime rates are negatively

12
correlated, while GDP and poverty show a positive correlation with crime in the long-run and a negative

correlation in the short-run. Other relevant analysis was conducted on Canada (Anderson, 2015; Janko

&Popli, 2015). Andersen (2015) performed his research on 10 Canadian provinces between 1981 and

2001 using hybrid modelling of GDP and unemployment to support Cantor & Land (1985) seminal

work that explain positive correlations on the long-term and negative ones on the short-term. While,

Janko & Popli’s (2015) time-series analysis of disaggregated crime by type and region showed no

significance of a positive relationship between crime and unemployment on the long-term; and thus

falsified the motivation hypothesis. Meanwhile, the short-run link between crime and unemployment

was highly significant and negative as hypothesized by the guardianship effect of Cantor and Land’s

(1985) theoretical framework.

Based on such literature, it is important to highlight the significance of using a panel approach over

a time-series one which increases the number of observations; allow greater degrees of freedom and

variations with control variables. Moreover, the use of panel’s fixed-effects with disaggregated data will

allow us to control for unobserved disparities, and thus mitigate omitted-variables bias. Moreover, the

continuous use of unemployment rates as a proxy for the labor market show to be less significant when

compared with other variables (Grogger, 1998; Gould et al, 2002). Finally, methods other than OLS

estimation regression show to provide more valuable results and limit inaccuracies as shown by Lin

(2008), Naryan & Smyth (2001) and Maddah (2013). Therefore, as proposed by Blomquist &

Westerlund (2014) the introduction of different methodological techniques, improved model

identification and better accountability of data statistics in the last two decades have solved the

theoretical-empirical paradox that existed in early literature, which might have occurred due to spurious

regression.

13
3. Data and Methodology

Following our earlier conclusions, the significance and specification of our model has to be

relevant to previous contributions on crime studies. Therefore, a panel data of the top ten states in the

United States of property crime were chosen to be studied from 1980 to 2014. The insignificance of

violent crime with unemployment found in early literature, allowed us to safely remove such variables

to represent our model. Property crime types recorded by the FBI’s Uniform Crime Report include three

categories; burglary, larceny-theft, and motor vehicle theft. Moreover, we added robbery rates for each

state and aggregated it along with property crime rates to specify our dependent variable, because we

were interested in property-related types of crime. Resorting to a panel approach of regional states was

to eliminate bias as much as possible and increase our degrees of freedom with a greater number of

observations.

Understanding crime rate trends with respect to economic changes, we chose our independent

variables based on available data present on the specified ten states. Therefore, based on Becker’s (1968)

seminal work and later theoretical literature contributions, our model is specified as;

CRIME= ƒ (UNEMP, POV, GDP, DROPOUT)

where CRIME is the sum of the four crime rates; burglary, larceny-theft, motor vehicle theft, and

robbery. UNEMP is the unemployment rate, POV is the poverty rate, GDP is per capita real GDP, and

DROPOUT is the high school dropout rate. Variable definitions and data sources of the model are

presented in Table 1. After collecting the data, there were some missing values for some years. This

has been addressed by getting the average between the value in the year preceding and the following

year. The expected results from regression are as follows:

(1) Positive correlation between crime rate and unemployment rate

14
(2) Negative correlation between crime rate and per capita real GDP

(3) Positive correlation between crime rate and poverty rate

(4) Positive correlation between crime rate and high school dropout rate

Table 1: Definitions and descriptions of the variables

Variable Symbol Definition Source

Crime Variables

Sum of Four Crime Rates CRIME Rates are the number of reported

the National Archive of Criminal Justice Data

FBI, Uniform Crime Reports, prepared by
offenses per 100,000 populations by
state

1) Burglary The unlawful entry of a structure to commit a felony or a

theft

2) Larceny-theft The unlawful taking, carrying, leading, or riding away of

property from the possession or constructive possession
of another

3) Motor vehicle theft The theft or attempted theft of a motor vehicle.

4) Robbery The taking or attempting to take anything of value from

the care, custody, or control of a person or persons by
force or threat of force or violence and/or by putting the
victim in fear.

Socioeconomic Variables

Unemployment Rate UNEMP Local Area Unemployment Statistics The Bureau of Labor
(LAUS) by statewide ` Statistics (BLS) of the U.S.
Department of Labor

Poverty Rate POV U.S. Bureau of the Census,

Current Population Survey,
Annual Social and
Economic Supplements.

Per Capita Real GDP GDP Per capita real GDP by state (chained North American Industry
2009 dollars) from 1997 - 2014 Classification System
(NAICS), The Bureau of
Economic Analysis of the
U.S. Department of
Commerce

Per capita real GDP by state (chained Standard Industrial

1997 dollars) from 1987 - 1997 Classification (SIC), The
Bureau of Economic
Analysis of the U.S.
Department of Commerce

High School Dropout Rate DROPOUT
The event dropout rates measure the U.S. Department of
percentage of public school students in Education, National Center
grades 9 - 12 who dropped out of school for Education Statistics,
between one October and the next. Common Core of Data
(CCD)

15
 4. Empirical Analysis

First, panel data descriptive analysis of the top ten US states is presented to explore the data before

the regression analysis. Table 2 shows some descriptive analysis of the dependent and independent

variables.

Table 2: Summary Statistics for the period from 1980 to 2014.

CRIME UNEMP POV GDP DROPOUT
Mean 4901.156 6.624571 16.60843 32013.16 5.984252
Median 4765.350 6.300000 16.50000 32150.50 5.618750
Maximum 7713.500 14.10000 26.50000 54934.00 17.79950
Minimum 3069.300 3.000000 8.000000 17072.30 1.400000
Std. Dev. 1006.761 1.913344 3.584481 10393.43 3.071869

In the appendix, trend graphs are drawn to show the trend of crime rate in each one of the ten

states from 1980 to 2014. Throughout the past 35 years, the trend in crime was not constant, but on

the overall level, the level of crimes in 2014 is lower than the level in 1980. In addition, there are four

scatter diagrams illustrated using e-views to show the correlation between each independent variable

with the crime rate. The negative slope is obvious in the Real GDP per capita-Crime rate diagram. At

the same time, the positive correlation between Dropout rate and the crime rate is clearly shown.

However, the other two scatter diagrams showing the unemployment rate and poverty rate with crime

have no clear trend, data are scattered.

A correlation analysis was conducted in Table 3 to see the statistical relationship between the

Crime rate and the four independent variables. The unemployment rate, poverty rate and real GDP

per capita are negatively correlated to crime, whereas the high school dropout rate is positively

correlated with crime. Two variables out of the four independents are differently correlated to crime

16
than the hypothesized direction; unemployment rate and poverty rate. However, they are statistically

insignificant.

The second phase of data analysis is the panel regression analysis. All the variables (dependent

and independent) were converted to log-form. For panel data, two types of regression methods are

utilized. The fixed effect model is estimated to fix for the cross-sections in the data. Then the random

effect model is estimated for the same data as indicated in Tables 4, 5, and 6.

Table 3

Covariance Analysis: Ordinary

Sample: 1980 2014
Included observations: 350

Covariance
Correlation
Probability CRIME UNEMP POV GDP DROPOUT

CRIME 1010672.
1.000000
-----

UNEMP -45.60643 3.650425

-0.023744 1.000000
0.6580 -----

POV -268.2655 2.965536 12.81179

-0.074551 0.433637 1.000000
0.1640 0.0000 -----

GDP -5728073. -5828.132 -12994.41 1.08E+08

-0.548992 -0.293914 -0.349795 1.000000
0.0000 0.0000 0.0000 -----

DROPOUT 2028.543 -0.043810 -0.759544 -10774.26 9.409419

0.657806 -0.007475 -0.069178 -0.338430 1.000000
0.0000 0.8892 0.1967 0.0000 -----

First, the fixed-effect model using Ordinary Least Squares regression method had the following

output:

17
Table 4
Dependent Variable: LOG(CRIME)

Method: Panel Least Squares

Sample: 1980 2014

Periods included: 35

Cross-sections included: 10

Total panel (balanced) observations: 350

Variable Coefficient Std. Error t-Statistic Prob.

LOG(UNEMP) -0.143142 0.029470 -4.857143 0.0000

LOG(POV) -0.216882 0.049682 -4.365390 0.0000

LOG(GDP) -0.439254 0.029546 -14.86701 0.0000

LOG(DROPOUT) 0.098588 0.025915 3.804293 0.0002

C 13.71375 0.402727 34.05226 0.0000

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.727882 Mean dependent var 8.476787

Adjusted R-squared 0.717353 S.D. dependent var 0.201542

S.E. of regression 0.107149 Akaike info criterion -1.590021

Sum squared resid 3.857560 Schwarz criterion -1.435704

Log likelihood 292.2537 Hannan-Quinn criter. -1.528597

F-statistic 69.13522 Durbin-Watson stat 0.415786

Prob(F-statistic) 0.000000

Then, the random-effect model is run using OLS regression method and the estimation output is as

follows:

18
Table 5
Dependent Variable: LOG(CRIME)

Method: Panel EGLS (Cross-section random effects)

Sample: 1980 2014

Total panel (balanced) observations: 350

Swamy and Arora estimator of component variances

Variable Coefficient Std. Error t-Statistic Prob.

LOG(UNEMP) -0.127604 0.028490 -4.478963 0.0000

LOG(POV) -0.214674 0.046870 -4.580202 0.0000

LOG(GDP) -0.412336 0.027867 -14.79659 0.0000

LOG(DROPOUT) 0.123958 0.023687 5.233063 0.0000

C 13.35847 0.379126 35.23495 0.0000

Effects Specification
S.D. Rho

Cross-section random 0.067704 0.2853

Idiosyncratic random 0.107149 0.7147

Weighted Statistics

R-squared 0.655998 Mean dependent var 2.190593

Adjusted R-squared 0.652010 S.D. dependent var 0.183108

S.E. of regression 0.108016 Sum squared resid 4.025309

F-statistic 164.4754 Durbin-Watson stat 0.390114

Prob(F-statistic) 0.000000

Unweighted Statistics

R-squared 0.562837 Mean dependent var 8.476787

Sum squared resid 6.197245 Durbin-Watson stat 0.261632

19
To choose whether the fixed or random effect model is preferred, we run the Hausman test. It

basically tests whether the unique errors are correlated with the regressor variables, the null

hypothesis states they are not. The null and alternative hypotheses are as follows:

H0: Random effect model is appropriate

H1: Fixed effect model is appropriate

If the probability is less than 0.05, we reject the null hypothesis and use the fixed effect model. If the

probability is more than 0.05, we accept the null hypothesis and use the random effect model. The

Hausman test result is shown in Table 7. The probability is 0.0475 which is less than 0.05, and

therefore it leads to rejecting the null hypothesis and using the fixed effect model.

Table 6

Correlated Random Effects - Hausman Test

Equation: Untitled

Test cross-section random effects

Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

Cross-section random 9.611211 4 0.0475

Cross-section random effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

LOG(UNEMP) -0.143142 -0.127604 0.000057 0.0393

LOG(POV) -0.216882 -0.214674 0.000272 0.8934

LOG(GDP) -0.439254 -0.412336 0.000096 0.0061

LOG(DROPOUT) 0.098588 0.123958 0.000110 0.0158

20
 Analyzing the fixed effect model, the following can be noticed. This is the estimated model

after substituting the resulted coefficients:

LOG (CRIME) = 13.3584 - 0.127 *LOG(UNEMP) - 0.214 *LOG(POV) - 0.412 *LOG(GDP) + 0.123 *LOG(DROPOUT) + u

All of the regressors are statistically significant in their impact on crime rate at 5% significance

level, but two of them had different signs than expected before regression. The constant intercept in the

equation equals 13.3584. The unemployment coefficient is negative, which means that if unemployment

rate increases by 1%, crime rate decreases by 0.14 %. When poverty rate increases by 1 %, crime rate

decreases by 0.21 %. If real GDP per capita increases by 1 %, crime rate decreases by 0.43 %. If high

school dropout rate increases by 1 %, crime rate increases by 0.098%. Therefore, the conclusion from

the findings is that the most effective regressor of the four regressors is the real wage indicator which

is consistent with other research outputs. R-squared value equals 0.727882, which means that 72% of

the variation in crime rate is explained by the four independent variables. . The Durban-Watson stat

value is equal to 0.4157 which is less than 2, thus this concludes that there is a positive autocorrelation

between the residuals.

It is essential to analyze the theoretical interpretation behind the previous empirical findings.

The real GDP per capita is the most significant variable that affected the crime rate and this result has

an important insight towards the economic theory of crime. The earlier research papers focused on

unemployment as the main economic variable behind the change in crime rates. However, recently more

research papers focused on wages as a significant variable affecting crime rates. In addition, the high

school dropout rates is a different indicator of education role or in other words the human capital role

in crime rate. The results show that the higher the dropout rate of high school, the more property related

crimes are committed and this output is in line with almost all research papers that included education

21
indicators in crime model. This gives an indication of how important education is in developing the

skills of an individual, because when a student does not complete high school, this decreases his chances

of finding well-paid jobs, thus increasing the probability of getting low wages and driving him to crime

through the motivation effect.

Next, we analyze two independent variables whose coefficients differ from the expected results.

Unemployment rates were negatively correlated with crime rate for the specific ten states we examined

in the last 35 years. This shows that for the states ranking highest in property crime, the guardianship

effect dominates the motivation effect as empirically found by Cantor and Land (1985) and Bharadwaj

(2014). This result supports the researchers who claimed that unemployment-crime relationship is weak

and mixed across empirical tests. The justification for the above negative correlation described by the

opportunity effect where more unemployment periods for households, makes them stay at home more

time, and consequently decreases the chances of thefts and burglary incidents. Specifically, in those ten

U.S states where citizens are aware of the high percentage of property crimes, they know that being

more at home and taking precautions about their left valuable items, criminals will have less chances

for property related crimes. Another note to mention is that the financial crisis that hit the U.S economy

in 2008 was an exogenous event that caused unemployment rates to suddenly increase in 2008, 2009,

and 2010 along with a declining trend of crime rate.

The poverty rate was found to be negatively related to crime rate in a significant manner which

goes in line with the findings of Cohen (1981). This is an anomaly regarding this relationship because

as poverty rate increases, it means that average wealth decreases and thus motivate criminal activity.

However, assuming the dominance of the guardianship effect, it is clear that as poverty rates increase,

individuals will guard more against their left wealth in order to avoid property related crimes. Exploring

the data, poverty rates are found to be very volatile trending up and down which again calls for using

22
 another reliable variable to indicate for poverty levels. This is evident when graphing trend graphs

(included in the appendix) for poverty rates especially in Arkansas, South Carolina, Arizona, and

Louisiana.

It is significant to note that a similar analysis was previously conducted, but the robbery crime

rate from the Crime Rate dependent variable was removed. The results had the same relationship

directions in the four independent variables. This was done to assure that robbery was not the reason

behind the negative relationships between unemployment and poverty rates with crime rate, since

robbery does not fall under Property Crime by the UCR definition.

5. Conclusion and Recommendations:

This paper examined the relationship between property related crime rate with economic and

human capital indicators using panel data in the highest ten U.S states in property crime. The results

show a negative relationship for the crime rate with the unemployment rate, poverty rate, and real GDP

per capita. Whereas, crime is positively correlated with the high school dropout rates. The research

output explores the significant effect of wages on property crimes showing it as the highest economic

factor in its effect on crime rate. The negative impact of unemployment and poverty on property related

crime rate suggests that for those specific U.S states examined, the opportunity effect dominated the

motivation effect in the economic theory of crime and this justifies the estimated output.

The significance of any empirical testing is to be translated into policy recommendations that

improves the general welfare of our nations. The importance of Human Capital can be seen through the

positive effect of high school dropout rate on crime rate. Education is not just a certificate to get, but is

necessary for the improvement and security of a human being in terms of morals, skills, excellence and

knowledge. If the quality of secondary education in content and delivery is improved, then students gain

23
interest and express a desire to remain in school; thus the opportunity cost of leaving school would

increase which is an increased benefit to the individual and the society. It has been one of the United

Nations Millennium goals to make primary education free, accessible to every individual. However,

when children are only primarily educated and then they drop out of school; then they will definitely

turn into criminals. Thus focusing on high school attainment and training to enrich students with market

demanded skills should be a higher priority in the policy makers’ list. This is the main driver behind the

growth of per capita wage for the individual and the GDP growth for nations, which is translated into a

lower motive for property crime and a better welfare for the whole society.

Among research limitations include the crime rate data from the FBI, which reflects only the

reported crime to police stations. The National Victimization Analysis Tool (NVAT) releases estimates

of crimes reported and not reported through surveys which makes its data more accurate. However, this

data could not be used because it is estimated only on the national level and available for only 20 years

from 1993 to 2014. Moreover, the limited time frame of the paper restricted our ability to adopt different

methodological applications for our model to avoid heteroscedasticity or serial correlation biases.

Recommendations for future research include more empirical testing of wages effect on crime

rate using updated cross-sectional data on other countries and comparing the results between the

developed and developing countries. In addition, examining the effect of poverty rates on crime in other

nations and choosing better indicators of poverty indices like the number of people under poverty line

because it focuses on the critically impoverished individuals, or examining relative versus absolute

poverty. Checking the accuracy of crime data is very essential due to the underreporting of crimes that

account for a large percentage of differences from real crime rates to insure data reliability and accuracy.

24
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27
 crime rate per 100,000 inhabitants crime rate per 100,000 inhabitants

1000
1500
2000
2500
3000
3500
4000
4500
5000

0
500

0
1000
2000
3000
4000
5000
6000
7000
8000
9000
7. Appendix

1980 1980
1983 1983
1986 1986
1989 1989
1992 1992
1995 1995
1998

Years
1998

(1980-2014)
Years
2014)

2001 2001
2004

Crime rate in Arizona

2004
2007
2007
2010
2010
2013
2013
Crime rate in Alabama (1980-

crime rate per 100,000 inhabitants crime rate per 100,000 inhabitants
0
1000
2000
3000
4000
5000
6000
7000

0
2000
3000
4000
5000
6000
7000

1000
1980
1980 1983
1983 1986
1986
1989
1989
1992
1992
1995 1995
1998
Years
(1980-2014)

1998

Years
(1980-2014)

2001 2001
2004 2004
Crime rate in Arkansas

Crime rate in Georgia

2007 2007
2010 2010
2013 2013

28
 CRIME RATE PER 100,000 INHABITANTS CRIME RATE PER 100,000 INHABITANTS CRIME RATE PER 100,000 INHABITANTS

1000
2000
3000
4000
5000
6000
7000
1000
2000
3000
4000
5000
6000
7000
8000

0
0
0
1000
2000
3000
4000
5000
6000
1980 1980 1980 7000
1983 1983 1983
1986 1986 1986
1989 1989 1989
1992 1992 1992
1995 1995 1995

Years
1998 1998 1998

Years
Years
(1980-2014)

(1980-2014)

(1980-2014)
2001 2001 2001

Crime rate in Texas

2004 2004 2004
Crime rate in Oklahoma

Crime rate in Louisiana

2007 2007 2007
2010 2010 2010
2013 2013 2013

CRIME RATE PER 100,000 INHABITANTS CRIME RATE PER 100,000 INHABITANTS
CRIME RATE PER 100,000 INHABITANTS

0
1000
2000
3000
4000
5000
6000
7000
0
1000
2000
3000
4000
5000
6000
7000
8000
0
1000
2000
3000
4000
5000
6000

1980 1980 1980

1983 1983 1983
1986 1986 1986
1989 1989 1989
1992 1992 1992
1995 1995 1995

Years
1998 1998 1998
Years

Years
(1980-2014)

(1980-2014)
(1980-2014)

2001 2001 2001

2004 2004 2004
2007
Crime rate in Washington

2007 2007

Crime rate in New Mexico

Crime rate in South Carolina

2010 2010 2010

2013 2013 2013

29
 Poverty Rates in Arkansas (1980-2014)
30

20

10

0
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Poverty rates in Louisiana (1980 -2014)

30
Poverty rate (in %)

20

10

0
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Years

Poverty Rates in Arizona (1980-2014)

25
Poverty rate (in%)

20
15
10
5
0
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Years

Poverty Rates in South Carolina (1980-2014)

25
Poverty rate (in%)

20
15
10
5
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Years

30
 16 28

14 24

12
20

Poverty Rate
Unemp. Rate

10
16
8
12
6

8
4

2 4
3,000 4,000 5,000 6,000 7,000 8,000 3,000 4,000 5,000 6,000 7,000 8,000

Crime Rate Crime Rate

60,000 20

50,000 16
High school drop out rate
Real GDP per capita

40,000 12

30,000 8

20,000 4

10,000 0
3,000 4,000 5,000 6,000 7,000 8,000 3,000 4,000 5,000 6,000 7,000 8,000

Crimes Rate per 100,000 Crimes Rate per 100,000

31

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