Mass Incarceration and the Underground Economy in America

With more than 850,000 people returning home from prisons and jails annually during an era of decarceration, understanding the labor market opportunities available to formerly incarcerated people is important for public policy. Yet, the mark of a criminal record has profound impacts on the employment and wage trajectories of disadvantaged men. Correspondence and audit studies routinely find that low-wage, secondary sector employers actively discriminate against those with criminal records, even when firms say they are open to hiring the formerly incarcerated. In this paper, we investigate whether the underground economy provides employment opportunities for men with criminal histories. Specifically, we assess whether formerly incarcerated men are more likely than their never-incarcerated counterparts to work in the underground economy, and how macroeconomic conditions shape the likelihood of working in the informal economy. We find that formerly incarcerated men are indeed more likely to work underground; however, the extent to which the macroeconomy shapes their odds of employment in either the formal or underground economies is significantly different for incarcerated men than their never-incarcerated counterparts. Our results have implications for understanding patterns of employment and wage mobility among disadvantaged men.