U.S. flag

An official website of the United States government, Department of Justice.

Will Inflation Increase Crime Rate?: New Evidence From Bounds and Modified Wald Tests

NCJ Number
221319
Journal
Global Crime Volume: 8 Issue: 4 Dated: November 2007 Pages: 311-323
Author(s)
Chor Foon Tang; Hooi Hooi Lean
Date Published
November 2007
Length
13 pages
Annotation
The study reexamines the relationship between crime and inflation and unemployment in the United States from 1960 to 2005 using the modified Wald (MWALD) causality test.
Abstract
The results suggest that inflation and crime rates are cointegrated with a positive relationship and the causal link is from inflation and unemployment to crime. The findings reveal that low unemployment rate does not mean low crime rate because inflation rate is also positively related to crime rate. Supply-side economic policy, reducing both inflation and unemployment rates simultaneously, could be one of the alternatives to reduce crime rate. As inflation and unemployment rates were the only variables used in this study the results might not fully capture the criminal behavior. Crime function in the United States was stable over the sample period. Results imply that inflation and unemployment rates cause crime rate, but there is no strong evidence of the reverse causality. An individual will engage in criminal activities because of their inability to maintain a particular level of living as a consequence of inflation and unemployment. Therefore unemployment is a shock effect that causes an individual to engage in criminal activities. Inflation causes the purchasing power to reduce while increasing the cost of living. As a result, crime rate may increase because an individual is unable to maintain his or her standard of living as before. However, this phenomenon does not happen immediately because it takes time for inflation to gradually reduce the individual's purchasing power. Crime rates rise as the inflation rate rises. Because of the lag between price and wage adjustments, inflation lowers the real income of low-skilled labor, but rewards property criminals due to the rising demand and subsequent high profits in the illegal market. Inflation destroys the confidence in the existing institutions' arrangements, resulting in a loss of social control, and erodes the economic ability of communities to maintain real leverage for deterrence. Tables, appendix