Wall St. and Business Wednesdays: The Economic Returns To Drug Selling In The Gang by Steven D. Levitt and Sudhir Alladi Venkatesh

In this section we attempt to measure the economic return to selling drugs in the gang. We begin with the ‘‘official’’ data reported in the gang’s books. Later, we incorporate ‘‘off-the-books’’ sources of income as well.

An individual’s rank within the gang is of critical importance for his personal remuneration. The local gang leader is the residual claimant on drug profits. The gang leader retains between $4,200 and $10,900 a month as profit, for an annual wage of $50,000–130,000. This value is well above what leaders could hope to earn in the legitimate sector given their education and work experience. For instance, a former leader of a rival gang is now employed in the legitimate sector at an annual salary of $16,000. His legitimate sector wage may be lower than it otherwise would have been, however, due to his intervening years spent in prison {Lott 1992; Nagin and Waldfogel 1995}.

The officers each earn roughly $1000 per month. This wage is relatively constant, although in war periods reductions some-times occur. These tasks are generally full-time jobs (in the sense that the people who perform them would be unlikely to be concurrently employed in the legitimate sector, although they may not strictly involve 40 hours of work per week). The standard of living associated with holding these jobs is only slightly higher than a full-time minimum wage job.

This gang is unusual in that foot soldiers for the most part received a flat wage. Compensation was not directly linked to the volume of sales. Their wage depended both on the number of shifts in which they distributed crack and on their position within their drug-selling team. Crack was sold in teams of six foot soldiers, with a team leader, a carrier who delivers the goods, two laborers who package the goods, make change, etc., and a lookout. Wages were highest for the team leader and lowest for the lookout who is typically an entry level foot soldier.

Our monthly data, however, are not broken down to that level of detail. The only information we have is total wages paid to all foot soldiers in a month. Based on field notes recorded at the time, we have a reasonably accurate assessment of the number of shifts that were taking place, other gang-related activities that required the participation of foot soldiers, and the number of active foot soldiers. By combining this information with total foot-soldier wages, we are able to construct estimates of monthly earnings per foot soldier and an hourly wage.

It is important to recognize that imprecision in all of these measures introduces uncertainty into our wage and earnings estimates. While not perfectly accurate, we are most confident in our figures on ‘‘official’’ monthly earnings per foot soldier. As discussed earlier, however, there are also ‘‘off-the-books’’ sources of income that are excluded from the gang’s accounting data. Hourly wage determinations are subject to greater uncertainty, both because of possible inaccuracies in our estimates of the number of shifts performed and due to the inherent ambiguity in determining whether some gang-related activities (e.g., gang meetings, attending functions as a member of the local leaders entourage) should be classified as work or leisure.

Official monthly payments to each foot soldier are low: only $200 per month or less until the final year. Based on observation and discussion with the gang leader, we estimate that the typical foot soldier worked four four-hour shifts per week selling drugs, and performed approximately four hours of other tasks for the gang, for a total of twenty hours of work per week. Hours worked per person appear to have stayed relatively constant over time. The increased demand for labor by the gang was accomplished through an expansion of the number of foot soldiers from approximately 25 at the beginning of the time period to over 60 in the final year. Based on these estimates of hours worked, the hourly wage earned by the typical foot soldier was below the federal minimum wage.

While these foot-soldier wages are strikingly low, there are both theoretical arguments and corroborating empirical evidence in support of these numbers. From a theoretical perspective, it is hardly surprising that foot-soldier wages would be low given the minimal skill requirements for the job and the presence of a ‘‘reserve army’’ of potential replacements among the rank and file. Similar features are observed in other gang case studies {Bourgois 1995; Padilla 1992}. Empirically, the behavior of the foot soldiers suggests that they are not well off financially. First, gang members below the level of gang leaders live with family because they cannot afford to maintain a separate residence. Second, many foot soldiers also hold low-paying jobs in the legitimate sector, typically working as service-sector employees in shopping malls and fast-food restaurants, performing physical labor such as demolition, or working in small local businesses like dry cleaners or grocery stores. We estimate that 75–80 percent of the foot soldiers are employed in the legitimate sector at some point over the course of a year. Job tenure, however, is generally quite low, so that perhaps only 40–50 percent of the foot soldiers are employed in the legitimate sector at any given point in time (see also Hagedorn {1994}).19 Previous research suggests that even among well-paid drug sellers {Fagan 1992; Reuter, MacCoun, and Mur¬phy 1990)}, more than 25 percent participate in the legitimate economy. The higher numbers we obtain for legitimate labor market participation are consistent with the lower drug-related earnings of the foot soldiers in our sample.

If there is one overriding puzzle in the data, it is the fact that foot-soldier wages rise dramatically in the final year of the data, more than doubling to $470 per month. There are a number of potential explanations for this phenomenon. One possible reason is that foot soldiers assume more of the responsibility for defend¬ing the gang’s turf, which carries great risk for which they must be compensated (as will be shown later, the risk of death almost doubles in the final year). Second, the gang leader becomes a member of the gang’s central leadership (the elite group of sixteen who oversee the entire organization). This dramatically limits the amount of time he is able to spend monitoring this particular group, perhaps providing an incentive to pay efficiency wages. Third, efficiency wages may also serve the purpose of ensuring the loyalty of this group, especially the newly incorporated foot soldiers who were formerly members of the rival gang. Maintain¬ing control of this turf is critical to the gang leader’s ability to remain as a member of the central leadership, a position that allows him to extort nearly $200,000 annually from other gangs across the city. While we were unable to ask the gang leader himself why foot-soldier wages increased so much, we asked another former leader familiar with the situation what his explanation was. His answer suggested that many of the arguments mentioned above may be part of the story:

You never forget then that got you where you are. You always got to treat them good ‘cause you never know when you need them. That n {the gang leader who took over another territory} don’t know if he can trust {his new foot soldiers} yet, so he gotta be real careful. If he don’t take care of his own boys, he ain’t gonna be up there {in the central gang leadership} very long, so he pays them real nice, you know. He just has to cause n got all these folks under him. It ain’t easy to watch all them, so you gotta make sure they on your side.

This was an excerpt from An Economic Analysis of a Drug-Selling Gang's Finances as published on pages 755 to 789 of The Quarterly Journal of Economics (Volume 115, Issue 3 - August 2000 issue). The entire report is available from The MIT Press.

Steven D. Levitt and Sudhir Alladi Venkatesh

Wednesday, July 27, 2005