Gang Economics, The University of Chicago

Gang economics
University of Chicago Magazine
October 1998
By Pamela Appea
http://magazine.uchicago.edu/9810/html/invest5.htm

It's not every economist who decides to tackle the topic of urban youth's involvement with gangs and drugs. Yet, says Steven Levitt, assistant professor in economics and the College, "crime is an extremely important issue and one that is really not studied enough, especially in academe-an economist might have something interesting to say."

As gang-related juvenile crime has increased during the past 15 years, Levitt explains, it has affected both participants' employment rates in the legitimate sector and the overall economic infrastructure of certain neighborhoods of big cities like Chicago, New York, and Los Angeles.

In 1997, Levitt, now 31, and Harvard sociologist Sudhir A. Venkatesh, AM'92, PhD'97, combined their quantitative and qualitative analytical skills to study the finances of street gangs. Their recent paper, presented in April at the U of C's Center for Race, Gender, and Politics, explored the socioeconomic structure of an inner-city, African-American gang. They found that, contrary to public perceptions, few gang members pocket lots of money. Indeed, says Levitt, the gang members could not make a living off their profits from drug sales alone.

Over a four-year period in the late 1980s and early 1990s, a former gang member, who now works in the legitimate business sector, kept careful records of his gang's profits, passing the information to Venkatesh on looseleaf sheets copied from the gang ledger. Levitt then created an economic model based on the gang's general expenses and its revenue from drug dealing and membership dues. For safety reasons, Levitt and Venkatesh chose to keep confidential their sources and the now-defunct gang's whereabouts and members.

The focus gang had a leader, three officers, about 75 foot soldiers, and some 200 rank-and-file individuals. The gang leader pocketed a documented average of $100,000 a year. Officers, who managed gang funds and drug operations, received an average of $1,000 a month, says Levitt, while the foot soldiers, the equivalent of part-time workers, earned no more than minimum wage selling drugs on the streets. Rank-and-file individuals, the freelancers of the drug world, did sporadic drug dealing for the gang.

During a profitable period, each gang member's earnings increased, and during times of infighting or gang wars, the foot soldiers got a boost in salary for the same amount of work. This cause-and-effect relationship in the gang's pay scales fits perfectly with an economic theory called compensating differentials, says Levitt. According to this theory, when a worker exerts more effort, or has to work with higher-than-usual risks, the worker will be compensated for the added labor and risk-taking.

Another economic theory, called tournament economics, became apparent during interviews with members of the focus gang about why they stayed in the group. Each member had a chance-albeit a small one-to become the gang leader, the person who takes the lion's share of the gang profits. Such a "tournament" situation, explains Levitt, emphasizes risk-taking for the chance of financial gain.

Levitt plans to do further multi-disciplinary research on gangs and crime, focusing on school-age children in Chicago and the socioeconomic factors that lead to gang alliance. "I think we are just getting started," Levitt says. "This financial data has raised a lot of questions on why people join gangs, since it is not that lucrative."-P.J.A.