Inside the ‘Black Box’ of the Nexus Between Economic Conditions and Crime: Can the Relationship Be Mitigated?

ABSTRACT This study examines how the impact of economic conditions on criminal activity is mitigated by the presence of labour market policies and that of a sizeable shadow economy. The analysis reveals a positive relationship between economic downturns and property crime, supporting the well‐documented idea that economic hardships intensify criminal activity. Most importantly, however, we find that the relationship is mitigated when active labour market policies, as well as labour training, are employed by enhancing skills and productivity, thus lowering incentives for criminal behaviour. Passive policies, on the other hand, also weaken the link, primarily through the income effect, with their effectiveness being increased in the presence of high levels of the shadow economy. High levels of both kinds of labour market policies and of the shadow economy significantly reduce crime, though additional investment in those shows different returns. These findings suggest that a comprehensive approach is required when effective crime reduction is considered during economic downturns, accounting for both formal and informal sector dynamics.