Revisiting the Relationship Between the Economy and Crime: The Role of the Shadow Economy

Despite decades of research exploring the relationship between the economy and crime, there is a lack of clarity in this literature. Questions remain, particularly with respect to how the economy is measured and whether the relationship between the economy and crime is the same across contexts. The literature to date has overlooked what is called the “shadow” economy, which represents unreported economic activity. We examine the relationship between traditional measures of the legitimate economy (e.g. unemployment) and crime as well as whether the shadow economy moderates this relationship using a panel of U.S. states from 1997 to 2008. Our results show that the shadow economy reduces the strength of the relationship between the legitimate economy and crime, and the effect of the economy on crime is conditional on the size of the shadow economy