The Correlation between the Rate of Unemployment

and the Rate of Total Crime

Cassandra Denis
San Jose State University
Spring 2016
Introduction to Econometrics
Mr. Matthew Holian

Introduction
The Financial Crisis in 2008 led to approximately 8 million job losses worldwide. The
recession, also known as the Great Recession, is often compared to the economical crisis during
the Great Depression that took place in the early 1900s. The recession lasted mostly through 2009
and 2010 and began to improve towards the end of 2010. However, approximately 70% of job
losses could not be recovered, despite having an increase in population since the recession.
According to crime patterns in most areas, the percentage of crime rates tend to be higher in areas
with higher levels of poverty. Therefore, it is safe to assume that having an imbalanced income
and no means of legitimate work available could probably serve as a substantial incentive for
unemployed individuals to commit crime.

Subsequently, crime rates have proven to be higher in regions with an imbalanced economy
and higher levels of poverty. The U.N recently reported that Honduras is currently the most
dangerous country in the world in terms of crime rates (CNN, 2014). Honduras is a small country
relative to the United States. However, most of the population currently earns an average income
of the lower standard median. These findings support the claim that unemployment, which causes
poverty levels to increase and income to eventually decrease, leads to an increase in crime rates.

On the contrary, local police records show that the increase in unemployment rates to 25%
during the Great Depression was also followed by a fall in crime rates in most areas of more
developed countries (Wilson, 2011). The argument to explain these statistics is that the increase in
unemployment led to an increase in communal bond. Subsequently, when parents were not able to
find jobs, they spent more time at home and were able to provide their undivided attention to their

children, which decreased the probability of juvenile crime. Nevertheless, this concept does not
apply in the culture of modern families, where children grow up to be more independent from a
young age. Therefore, there is a higher chance of rebellion compared to the time of the Great
Depression. Theoretically, criminologists now assume that a percentage increase in unemployment
will result in a 2% increase in crime rates (Wilson, 2011).

This purpose of this analysis is to test if there is a correlation between unemployment rates
and crime rates in a given county. The hypothesis being tested is based on the assumption that
there is a correlation between unemployment rates and crime rates. The rationale for this
assumption is that unemployment may eventually cause a person to not be able to sustain a living.
Therefore, a sudden loss in income will probably drive a person to commit crime in order to
survive. The regression analysis is measured using the method of panel data with fixed-effect
models to determine the relationship between increasing unemployment rates and the rate of crime.

The data set includes statistics obtained in 2008 and 2009 through the records of the
American Community Survey (ACS) by the U.S Census Bureau. The unemployment rates and
crime rates of 2008 and 2009 were chosen because the recession that happened in 2008 comes
close to the recession that happened during the Great Depression. Therefore, it is the most relevant
data that is comparable to the unemployment rates and crime rates during the Great Depression.
The observations taken are specifically based on counties in the state of California. Fixed effects
models are implemented into the regression equation in the form of binary variables to increase
the statistical significance and accuracy of the model. Fixed-effect models also obliterate the
probability of omitted variable bias.

Literature Review and Economic Theory

Professor Will Jennings of the Centre for Crime and Justice studies department at the
University of Southampton conducted a study on the correlation between economic cycles and
crime rates. Although there used to be a high correlation a few decades ago, there is evidence of a
continued disintegration between economic cycles, especially unemployment rates, and crime
rates since the new millennium (Jennings, 2015). He argues that this could be a result of the
advancement of technology that prohibits criminal activity, such as CCTVs and house alarms.
Consequently, there is also a difference in the nature of unemployment. There seems to be a
hierarchy in which people are driven out of the labor force. For example, in light of a recession,
companies tend to release their best workers first. Firms believe that the most hardworking and
talented individuals will have no trouble finding work (Nisen, 2012). Therefore, they would not
be unemployed for long, which will probably not put them in a position to have an incentive to
commit crime.

On the contrary, associate professors of economics at Ohio State University have found a
strong correlation between crime rates and the rate of unemployed men without a background of
high level education. From the early 1980s till the late 1990s, federal statistics showed that an
approximate 20% decrease in wages for men without college degrees was followed by a substantial
increase in property and violent crime rates by 21% (Weinberg, 2002). It is important to note that
the only crime rates which increased in these statistics were property and violent crimes, such as
assault. These types of crimes are usually driven by the motive of monetary gain. Subsequently,
there was no correlation between unemployment and the rate of murder and rape, which are crimes
that are usually driven by other motives besides monetary gain (Weinberg, 2002). Therefore,

Weinberg concludes that these findings prove the argument of unemployment in poor economic
conditions as being correlated to a fraction of the overall rate of crime.

From an economic standpoint, it is not hard to understand the incentives of individuals who
commit property and violent crime. Based on the economic theory of equilibrium, individuals are
often in a position to choose between the cost and benefits of legitimate and illegitimate work.
Hence, when legitimate work becomes increasingly unavailable, individuals are driven to pursue
illegitimate work for monetary gain. The demand of individuals for certain commodities are
inelastic regardless of the decrease in supply of work. For example, these individuals may be
driven by the incentive to protect the welfare of their families.

According to the economic model founded by Isaac Ehrlich in 1973, individuals respond
to the incentives that are measured using the equilibrium of cost and benefit analyses (Ehrlich,
1973). In his study, he omits social and environmental factors that are independent of an
individuals will to survive. These social factors include moral values and laws that may have been
imposed to prohibit crime. These social and environmental factors become irrelevant in the process
of decision making when an individual is under the pressure of protecting the things that they
prioritize, such as the welfare of their families and their own health and survival. Another factor
that influences the decisions of an individual to commit a crime is the possible consequence of
their actions. Depending on the severity of their situation and the scarcity of their income, they
may only agree to participate in illegitimate activity if they assume that they will not have to bear
a heavy consequence. This is why the property crimes and violent crimes that increased with the
rate of unemployment were on a comparably smaller scale.

Studies have also shown the correlation between the probability of crime with the age of
an individual. Crime patterns are more prevalent within individuals who are young male adults
(Moffitt, 1993). American psychologist, Terrie Moffitt, suggests the common characteristic in
criminals tend to be antisocial behavior that may begin in an early age and persist during
adolescence (Martens, 2000). This theory assumes that personality traits also play a significant
role in the correlation between unemployment and crime rates, aside from educational background
and poverty levels. Consecutively, regions with a high rate of unemployment and poverty levels
with an older average population may see less of a correlation between unemployment and crime
rates. Despite the incentive of monetary gain, older age probably reduces the individuals mobility
and ability to perform crime compared to someone who is younger and more agile.

Data Description and Methodology

The methodological approach to estimating the correlation between unemployment rates
and crime rates is to use the described data below to estimate the following model using ordinary
least squares:
TotalCrimeRates = b0 + b1(Unemployment) + b2(Year)+ b3(C1)+ b61(C58)+ ui

where TotalCrimeRates is the dependent variable and refers to one of the four measures of crime
rates for counties in California. The independent variables include California counties, year (2008
and 2009) and the rate of unemployment in a given county for both years. The betas in the
equation are the coefficients of the independent variables that are to be estimated and ui is the
value of the error term with similar properties. B0 represents the constant coefficient in the
regression equation. The regression mentioned above is in the form of a linear regression.

However, the equation below represents a second regression that was estimated using natural logs
to increase the accuracy and statistical significance of the model:

LnTot_Crime = b0 + b1(LnUnemploy)+ b2(Year)+ b3(C1)+ b61(C58) + ui

In both regression models, the variable(s) Counties and Year used are fixed-effect models.
The data on the total crime rates were obtained through the online portal on the State of California
Department of Justice (OAG, 2015). The data on the rate of unemployment based on counties in
California for the year 2008 and 2009 were obtained through the American Community Survey
(ACS) of the United States Census Bureau.

The initial model of regression included the total crime rates as the dependent variable and
the independent variables included California counties (58 counties), year (2008 and 2009),
unemployment rates, levels of education (Bachelor degree), average income of population and
average race of population. From this model, the unemployment rates, total crime rates and the
average income of population were continuous variables. The level of education and average race
of population were also included as binary variables aside from counties and year. The level of
education was measured based on if the individual had a bachelors degree or not. This variable
was believed to have an influence on the regression results because individuals with lower levels
of education would be less likely to find employment. However, this is subjective on the type of
jobs that are available and the level of skills that an individual has.

The race of population was based on if the individual was ethnically white or non-white.
Race was taken into account because the analysis was based on the United States, where racial
issues could influence the unemployment of an individual. Furthermore, during the Great
Depression, most unemployed individuals were non-whites. However, this variable may not have
a significant effect in the recession in 2008 and 2009 because the racial situation in the United
States, particularly California, is not as crucial as it once was. Since the Great Depression, there
has been a significant increase in the racial diversity in most of the state of California. Therefore,
this variable may be negligible and may not influence the regression results. Nevertheless, it was
difficult to test this assumption by incorporating this variable into the regression because it was
difficult to obtain accurate data.

The variable(s) Counties and Year were transformed into binary variables and one county
and one year were omitted to avoid perfect multicollinearity. The variable(s)

Unemployment and TotalCrimeRates remained as continuous variables. The binary

variables are measured in the regression analysis using a fixed-effect model. In a panel data
analysis, fixed effect models refer to a constant coefficient to account for a variety of
individual observations that are assumed as one entity. In this case, the fixed-effect is
applied to the Counties variable, which technically has 116 coefficients.
There is a total of 58 counties in California. However, the summary of observation

mentions 116 observations because it takes into account the statistics for each county in
the year 2008 and 2009 as separate entities. STATA mentions 0 observations for the
summary statistics of the Counties variable because there were no numerical values
added into that column. Therefore, the program could not recognize it to perform the
measurement.

Total Crime Rates / Unemployment Rates

100000
90000
80000
70000
y = 0.0061x
R = -0.0232

60000
50000
40000
30000
20000
10000
0
0

2000000

4000000

6000000

8000000

10000000

Figure 1 Scatterplot for Total Crime Rates on Unemployment rates

12000000

According to the scatter plot above, there is a positive correlation between the total crime
rates on the rate of unemployment. However, the value of the slope is relatively small (0.0061)
and may hold no statistical and practical significance. In addition, the R2 value mentioned in the
scatterplot trend-line is a negative value. The R2 value measures the fit of the chosen model and
the horizontal straight line, which is also known as the null of the hypothesis. In this case, the null
would assume that there is no correlation between total crime rates and the rate of unemployment.
Therefore, this indicates that the chosen model, which implements a linear line, is more inaccurate
than the fit of the horizontal line, which is the null hypothesis. Hence, it shows a possibility of
accepting the null hypothesis and rejecting the initial assumption of the possibility of a correlation.

Empirical Results
Table 3. Regression Results
Variables
Unemployment

(1)
TotalCrimeRates
0.00464***
(-0.000649)

LnUnemploy

(2)

(3)
LnTot_Crime
4.94e-07***
(-0.000000136)

200.2
(-321.7)

-0.0108***
(-0.00343)

5,505***
(-1266)

5,511**
(-2545)

7.574***
(-0.138)

8.901***
(-0.0284)

116
0.11

116
0.005

116
0.119

116
0.991

TotalCrimeRates

Constant


Observations
R-squared

(4)
LnTot_Crime

Counties Fixed-Effects

Yes

Yes

Yes

Yes

Time Fixed-Effects

Yes

Yes

Yes

Yes

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, *p<0.1

In the first model, a linear regression was estimated on the rate of total crime on the
unemployment rate. Based on the table above, the coefficient of the rate of unemployment is
statistically insignificant (0.00464<Critical value of 1.96). This proves that the null hypothesis is
accepted, in which to stay that there is little to no correlation between the rate of unemployment
with the rate of total crime. R2 is the value that determines the fraction of the variance between the
dependent variables that are caused by the independent variables in a given regression equation.
In addition, the low value of R2 in the first model also shows low levels of correlation between the
rate of unemployment and the rate of total crime. The P-value in the first model indicates a value
that is less than the 0.01 significance mark. The P-value measures the probability of wrongly
accepting the hypothesis or rejecting the null hypothesis in a regression analysis. Therefore, a Pvalue that exceeds the 10% significance level is considerably high, which would mean that the
hypothesis is most likely to be inaccurate.

In the subsequent models, logarithmic methods were used to transform the dependent
variable, which is the rate of total crime, and the independent variable, which is the rate of
unemployment. These regression equations are based on the specifications shown below:

Figure 2. Log model specifications

Model Regression Specification
I
Y1 = 0 + 1Ln(Xi)+Ui
II

Ln(Y1) = 0+1X1 + Ui

III

Ln(Y1) = 0+Ln1X1 + Ui

Interpretation of 1
A 1% change in X is associated with a change in Y of 0.01 1
A change in X by one unit (X = 1) is associated with a 1001%
change in Y
A 1% change in X is associated with a 1% change in Y,
so 1 is the elasticity of Y with respect to X

The logarithmic regression model was estimated due to the low measure of fit in the first
linear regression model. Logarithmic methods are used to transform the data into a normal
distribution, which is more accurate and statistically significant than most linear models. The
narrow distribution of log variables also assists in limiting the effects of possible outliers in the
regression model. Based on the fourth model in this regression analysis, a 1% change in the rate
of unemployment is associated with a 0.01% change in the rate of total crime. This shows that
there is a low correlation between the rate of total crime with the rate of unemployment. Therefore,
the elasticity level is 0.01%, which is a statistically insignificant value. This proves that the rate of
unemployment does not significantly determine the elasticity of the rate of total crime. Hence,
there is little to no correlation between those two variables. To reiterate this claim, the R2 value in
the fourth model is almost 1, which is significantly high. However, the R2 is not taken into
consideration in the logarithm method because a normal distribution is an accurate measure of fit.
However, the coefficient of the variable is still statistically insignificant. Therefore, the hypothesis
is rejected and the null hypothesis is accepted.

In addition, this model contains possible threats of external validity as a result of overgeneralization. The data in this regression model assumes that the consequences of unemployment
are homogenous. However, as much as the significance of an individuals level of education
applies, the consequences of unemployment may also vary based on an individuals ethnicity
and/or gender. During the Great Depression, there was a pattern of unemployment within women
and people of color, which led to an increase in the rate of crime as a result of long-term
unemployment due to conditions that were unfixable. Therefore, crime rates also depend on the
work opportunities that each individual has based on their background and circumstances.

According to the Public Policy of the Institute of California, approximately 6% of the population
of the state are undocumented immigrants, particularly from Latin America (PPIC, 2016). As a
result of this, there is a surplus in the potential labor force but a shortage in the demand for
legitimate work. It is illegal to hire an undocumented worker. This factor increases the rate of
unemployment relative to the population of the state.

The internal validity of a regression is conserved through an unbiased and consistent

estimator of the correlation and causal effect. In this regression model, the rate of unemployment
in a given county is assumed to be the independent variable that is positively correlated to the rate
of total crime in that respective country. However, certain variables that were omitted, due to a
lack of practical significance, could also alter the results of the regression analysis. For example,
the variable of average race could have influenced the rate of total crime. The model assumes the
homogeneity of race. Certain counties within California are more racially diverse than other
California counties.

This could lead to a certain level of racism that influences employment in a given region.
In addition to racial diversity, the average rate of English speakers also influences the rate of
unemployment. English speakers are more likely to have more work opportunities than their
counterparts because they would undergo the necessary trainings more easily and would be more
adaptable to the needs of the company. As a result, the model may include some levels of omitted
variable bias. Omitted variable bias (OVB) occurs when the omitted variable is correlated with the
independent variables and are also determinants of the dependent variable in a given regression
equation. Therefore, some variables that may be responsible for a causal effect are omitted from

the equation. A solution to reducing these omitted variable biases in the regression model is by
including one or more of these variables in the regression model based on its level of significance.
However, it was difficult to obtain the relevant data to include these variables into this regression
analysis.

Conclusion
As an economics major, I always believed in giving people the benefit of the doubt,
especially when it came to crime. I assumed that individuals who conduct crime usually agree to
it because they have no other alternatives in ensuring sustenance, especially in the light of
continuous unemployment. However, this regression analysis proved that my assumptions may
have been inaccurate. Although the rate of unemployment may not have had a direct effect on
influencing the rate of total crimes, there were several variables that I had omitted from my
regression equation that could have influenced causality in this case, which may have resulted in
a less accurate regression analysis. If I had a chance to run this regression again, I would prefer to
include variables such as ethnic backgrounds and citizenship, level of education and average
decline in income. I was unable to include most of these variables in this regression analysis
because there were no accurate data available on the subject matter. In addition, the rate of
unemployment may be correlated with other variables such as the decrease in average income and
the increase in poverty levels. These resulting variables could potentially be more correlated to
crime rates if prolonged. Hence, a more accurate regression would have been within a longer time
period and focused on a multinational level. For example, a constant decrease in the rate of
unemployment within a span of 10 years, while also taking into account these additional variables.

However, the rate of unemployment constantly fluctuates and has never been in a steady decrease
for extended periods of time. Nevertheless, the rate of unemployment does not have a statistically
significant correlation with the rate of total crimes. However, it influences other factors that could
lead to an increase in crime over time.

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