Crime, unemployment and economic growth

Crime is a vexing problem throughout the world but nowhere so much as in the developing world. Although crime statistics are generally less reliable in developing countries there is no doubt that they have a greater incidence of crime. People respond to incentives and make choices based on the potential returns of their actions. In low-income countries the returns to education are generally low, so young people are more likely to leave school if faced with opportunities for better returns. Moreover, countries with higher rates of unemployment experience higher rates of crime.

The cost of doing business is significantly increased in countries that have high crime rates because businesses are forced to spend resources in protecting their employees and their assets. These ‘investments’ are virtually a deadweight loss to society. This money could be invested in more fruitful ways that add to the productivity of the country. Furthermore, crime degrades the quality of life and frightens away skilled immigrants. It may also force others to leave and settle in more peaceful countries. By adversely affecting peoples’ movements, crime discourages the accumulation of human capital, thereby diminishing the country’s available pool of knowledge.

But what can be done to reduce the levels of crime in these poor countries? A recent article, Let government go shopping for criminals by Eustace Davie, suggested the novel idea of remunerating people for reporting crimes. The author suggested that government could go shopping for criminals by establishing a generous reward system for anyone who provides information that leads to the apprehension and conviction of wrongdoers. Poor people, who are very often the victims of crime, could become the eyes and ears of the law and in so doing earn extra money for their good deeds. Furthermore, severe punishments could be imposed on dangerous criminals. The threat of punishment has a deterrent effect and as Nobel prize-winning economist Gary Becker explains, “Making a threat is a lot cheaper than hiring a huge police force”.

In the long run, the crime rate could be significantly reduced by rapidly increasing the wealth of the country’s citizens, for which high economic growth is essential. One of the best ways to grow an economy is through economic freedom. The foundations of economic freedom are personal choice, voluntary exchange, freedom to compete and security of privately owned property. The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. One of the key objectives in compiling the EFW index is to establish whether relationships exist between economic freedom and economic growth and wealth.

The findings in the report unambiguously support the fact that economic freedom is strongly correlated to prosperity and growth; countries that are economically free tend to grow faster and be more prosperous. Moreover, countries with higher levels of economic freedom have less unemployment. Artificial barriers such as minimum wages, laws providing high levels of job security, and high compliance costs, prevent the labour market from functioning efficiently and destroy job-creating processes. Reducing chronic unemployment in SA requires government to remove artificial constraints on the functioning of the labour market.

It is therefore unfortunate that the Minister of Labour recently announced the implementation of minimum wages for hospitality workers – R1,650 per month overall, while employers with 10 employees or fewer will be required to pay staff R1,480 per month. The Joint Economic Committee of the US Congress surveyed 50 years of research on the minimum wage and concluded that the majority of researchers found negative consequences from imposing such a measure. Most researchers reported that the imposition of minimum wages, or increases in the minimum levels, caused increased unemployment, especially among young people.

The fundamental economic logic is that if setting a minimum wage of R1,650 per month can improve conditions for workers, then a minimum wage of R10,650 per month should improve conditions even more. Clearly a minimum of R10,650 would make even more people unemployable than are currently kept from working. A minimum wage of R1,650, excluding tips, in an industry that relies on tips to improve service to customers and often has people working solely for tips, will disrupt the functioning of many businesses and put some people out of work.

The people who are generally forgotten are the many who don’t get jobs as a result of such legislation. Those who lose jobs are seen while the unfortunates who never get jobs because of legislative barriers are its unseen victims. They live in misery off their families and friends or, in turn, off the victims of their crimes.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article/5 June 2007