Working Papers

We study the implications of incarceration for the earnings and employment of different groups, characterized by their race, gender, and education. Our hidden Markov model distinguishes between first-time and repeat incarceration, along with other persistent and transitory nonemployment and earnings risks, and accounts for nonresponse bias. We estimate the model using the National Longitudinal Survey of Youth 1979 (NLSY79), one of the few panel datasets that includes incarcerated individuals. The consequences of incarceration are enormous: First-time incarceration reduces expected lifetime earnings by 39% (59%) and employment by 8 (13) years for black (white) men with a high school degree. Conversely, nonemployment and adverse earnings shocks increase expected years in jail. Among less-educated men, differences in incarceration and nonemployment can explain a significant portion of the black-white gap in lifetime earnings—44% of the gap for high school graduates and 52% of the gap for high school dropouts.