Research / BFI Working PaperAug 09, 2023

The Impact of Incarceration on Employment, Earnings, and Tax Filing

Andrew Garin, Dmitri Koustas, Carl McPherson, Samuel Norris, Matthew Pecenco, Evan K. Rose, Yotam Shem-Tov, Jeffrey Weaver

We study the effect of incarceration on wages, self-employment, and taxes and transfers in North Carolina and Ohio using two quasi-experimental research designs: discontinuities in sentencing guidelines and random assignment to judges. Across both states, incarceration generates short-term drops in economic activity while individuals remain in prison. As a result, a year-long sentence decreases cumulative earnings over five years by 13%. Beyond five years, however, there is no evidence of lower employment, wage earnings, or self-employment in either state, as well as among defendants with no prior incarceration history. These results suggest that upstream factors, such as other types of criminal justice interactions or pre-existing labor market detachment, are more likely to be the cause of low earnings among the previously incarcerated, who we estimate would earn $5,000 per year on average if spared a prison sentence.

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