Impacts of criminal records on labor market outcomes: Theoretical and empirical evidence from Denmark

This paper investigates the impact of criminal records on labor market outcomes in frictional labor markets. I first develop a theoretical model within a search and matching framework that includes heterogeneous firms and workers. Prejudiced firms experience disutility from hiring ex-offenders and thus only hire workers without criminal records. Consequently, ex-offenders receive job offers exclusively from unprejudiced firms, while workers without criminal records receive offers from both types of firms. This disparity leads to additional search frictions for ex-offenders. Using Danish register data from 1986 to 2003, I empirically confirm these theoretical predictions. The results show that ex-offenders face increased search frictions immediately upon release and while unemployed, though these frictions dissipate once they are employed and job searching on the job. Interestingly, the wage distribution of ex-offenders surpasses that of workers without criminal records, with ex-offenders earning, on average, 28% more. The model’s fitted wage distribution explains 70% of the wage gap observed between the two groups. Additionally, the model suggests policy implications: longer prison sentences and stricter policing may lower crime rates, while labor market interventions, such as career training and enhanced social assistance for ex-offenders, can support rehabilitation and reduce recidivism. However, these interventions might also have unintended effects, potentially neutralizing their impact on overall crime reduction.