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Speaking of the Economy
Speaking of the Economy - Grey Gordon and Urvi Neelakantan
Speaking of the Economy

May 12, 2021

Beyond Jail: The Economic Consequences of Incarceration

Topics: Workforce Development, Labor Force Participation
Audiences: Community Advocates, Economists, General Public
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Millions of Americans face diminished earnings and employment prospects years after they have spent time in prison. Grey Gordon and Urvi Neelakantan share their insights on this issue, which they have recently examined along with several colleagues at the Richmond Fed. Gordon is a senior economist and Neelakantan is senior policy economist.

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Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

Today we'll be talking about the millions of Americans whose earnings and employment prospects are damaged years after they've spent time in prison. [Successful efforts to use remote learning to teach incarcerated students during the pandemic were highlighted during the finale of our District Dialogues series.] Grey Gordon and Urvi Neelakantan have studied this phenomena and recently published their insights in an Economic Brief. We'll talk to Grey and Urvi about this research and analysis that others have done, including John Bailey Jones and Kartik Athreya in our department, on the economic effects of incarceration.

Thanks for joining us.

Grey Gordon: It's a pleasure.

Urvi Neelakantan: Thanks for having us.

Gerena: Let's start by establishing the scope of the issue. Since 1995, there has been at least one million people in federal and state prisons throughout the United States, or about 400 inmates per 100,000 residents. Grey, how does this number compare to past decades and to other industrialized nations?

Gordon: We've seen tremendous growth in incarceration rates over the last few decades. [From] 1980 to 2010, the incarceration rate more than tripled. And while it's declined somewhat since 2010, it still remains very high. In our data, some subgroups have as many as 12 percent of persons currently incarcerated.

For some people, this is a really big issue. The U.S. has one of the highest, if not the highest, incarceration rates of all countries, not just industrialized ones.

Gerena: Those are startling statistics.

It has been often said that incarceration rates in the United States are higher among Black men. Urvi, how else do incarceration rates vary?

Neelakantan: If you look at data that's publicly available, you'll see big differences in incarceration rates on demographic factors such as race and gender, and the level of education that someone's attained.

If you look at particular combinations of those factors, you find that some of those subgroups have very high incarceration rates. For example, less educated Black men have very high incarceration rates.

One of the most striking things we saw in the data was that over two thirds of Black high school dropouts born between 1975 and 1979 had been incarcerated at least once. And that's really startling.

Gerena: Why do these variations matter, particularly when it comes to research you and others have done on the economic impacts of incarceration? This question is for either of you.

Gordon: When we started working with our co-authors on this project, our focus was on trying to understand the black-white wealth gap. Part of that is first understanding differences in earnings, as how much you can save depends on how much you earn in the first place.

Most work on earnings, because of data availability, has focused on non-institutionalized populations. Because the U.S. has such high and variable rates of incarceration, that is not a population one can simply leave out and hope to get a full understanding of gaps between different groups of people, in particular between black and white persons.

Gerena: Tell me more about the consequences of incarceration. How does a stint in jail impact a person's earnings over his or her lifetime, for example?

Gordon: We found that becoming incarcerated for the first time drastically reduces lifetime earnings. A good number to keep in mind is about a 50 percent reduction in lifetime earnings.

This happens through three channels. The first is people don't earn while they're in prison or jail. [Second] they find it harder to find jobs after being incarcerated. [Third] when they do find jobs, it's at lower wages.

Another pretty dramatic thing we found was that whether one was Black or white, a high-school graduate or drop out, earnings after becoming incarcerated essentially were uniformly low. First-time incarceration has a larger effect on lifetime earnings and levels for white men. That is, the lifetime earnings drop measured in dollars is larger for white men than for Black men. But then we also see in our data that imprisonment and incarceration are more prevalent among Black persons. The combined effect of incarceration on lifetime earnings is somewhat ambiguous. You have larger losses per incarceration for white men and you have more incarcerations for Black men.

One thing we try to do is tell how much of the black-white earnings gap that we see can be attributed to non-employment and incarceration. When we run some statistical exercises, we find that that's about 50 percent for high-school graduates, and more than that for less than high school graduates.

Finally, the effects of incarceration are extremely persistent, lasting for 20 years or more. Possible explanations for those persistent effects are the inability or unwillingness to employ previously convicted persons or depreciation of skills while in prison. But we have not tried to distinguish between these possible explanations yet.

Gerena: So what happens to the job prospects of former inmates?

Neelakantan: Okay, so Grey just talked to you about this big reduction in lifetime earnings. The fact that job prospects of former inmates are so much dimmer is one of the big things that's driving this reduction in earnings.

So let's focus on what happens after you've been incarcerated for the first time. You know, once you leave [prison], the number of years working falls dramatically. If you want a number, it's about 10 years. If you think of what the length of an actual working life is, this amounts to a 36 percent reduction in the amount of time you work over the lifetime.

This happens for a couple of reasons. One is that you end up having more [incarceration] spells — once you've been incarcerated once, you're more likely to have another spell. So that takes away from your working time. Also, you're just not employed more often.

Gerena: You bring up something interesting about recidivism. Does it matter how long somebody is in jail or in prison, in terms of the impact on earnings or job prospects? Also, if you're in jail multiple times, does that make it worse?

Neelakantan: I don't think we looked at the incarceration spell and the effects it has. But the one thing that stands out is once you've been incarcerated, the likelihood of that happening again goes up dramatically. Whether we have any numbers, Grey, do you remember to say anything more about that?

Gordon: If you become incarcerated for the first time, your expected future years in jail increases by about, for some groups, as much as like seven or eight years. Only a third of that is due to that first stint in prison.

Gerena: It sounds like a big chunk of our population won't reach its full economic potential. Yet so little is known about the incarcerated. Why is that?

Neelakantan: Most of the surveys that we commonly use in economics — the household surveys such as the Current Population Survey or the Survey of Consumer Finances [or] the Panel Study of Income Dynamics — these don't include information on whether someone's incarcerated. The datasets that do have incarceration data, they're more specialized and they don't really represent the U.S. population as a whole. Or, they don't have high quality information on earnings, especially over a person's lifetime.

The one notable exception to this is the dataset we've used, which is the National Longitudinal Survey of Youth. It has incarceration information and it's also nationally representative. And it's a panel, which means that we can follow people over time — it tracks a cohort of youth who were born between 1957 and 1964. And we can see their earnings histories, their employment histories, their incarceration histories. So it's really a very good dataset for the questions we are trying to address.

Gerena: Why does the Richmond Fed care about this topic? Obviously, it's important that so many people's productivity, if you will, is going to be impacted over the long run.

Gordon: The Fed has an interest in labor market participation and unemployment as part of its mission. And our contribution is to highlight the role of incarceration as one of those drivers.

We're also fortunate to work at the Richmond Fed, where we're supported as economists to work on a broad range of topics that affect our national economy and our district. There are many other facets to black-white gaps that we're working on examining, such as housing returns and the wealth gaps that I mentioned earlier.

Neelakantan: I think one thing that would be useful to mention is that incarceration is devastating for everyone. Grey was talking about this earlier — it really makes earnings low for everybody.

Once you're, say, high school or college educated, compared to having less than a high school degree, your earnings prospects are better. But you fully undo that if you happen to get incarcerated. Now, the chances of that happening are less as you have a higher level of education. But the bottom line is that incarceration just wipes out gains for everybody.

The loss is big for everyone, but incarceration rates are so much higher for Black persons and especially less educated Black men. And so that's why you see that it has a disproportionate impact on that community.

Gerena: Grey and Urvi, thanks for summarizing the key points in your Economic Brief. I would encourage our listeners to read more about this topic in that essay as well as in an article published in the fourth quarter 2020 issue of Econ Focus, our economics magazine.

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