Abstract

Earnings inequality serves as a proxy measure for the disparity between illegal and legal gains and is therefore theorized to be correlated with the occurrence of crime. Using a state-level panel dataset of the United States of America from 1980 to 2014 this paper interrogates the casual relationship between the inequality of earnings in the lower tail of the earnings distribution and crime rates. Since labor market wages and crime rates are simultaneously determined, the bindingness of each state’s legislated minimum wage is used as an instrument to identify the causal relationship between lower tail earnings inequality and the incidence of crime. The favored regression model also includes several important fixed effects, to avoid omitted variable bias. I find evidence of a weak relationship between lower tail earnings inequality and violent crime. I find no evidence of a relationship between lower tail earnings inequality and property crime. The findings are robust to a variety of alternative model specifications.