REMOVING LEADERSHIP OF CRIMINAL ORGANISATIONS CAN HURT LOCAL LABOUR MARKETS: Evidence from México

12 Apr 2021

A commonly used policy against criminal enterprises of removing their leadership can have unintended adverse consequences for local labour markets, according to research on Mexico by Daniel Osuna-Gómez. His study finds that after ‘decapitation’ of crime kingpins, regions with cartel presence saw a decline of 5.3% in wages, partially explained by a switch from paid to unpaid work. This timing coincided with an increase in violence, but the wage effect was not confined to municipalities with large increases in violence.

Thus, governments face a difficult problem: on the one hand, a direct and strong fight against these organisations could lead to an increase in violence and adverse effects on employment; on the other hand, allowing criminal syndicates to increase in strength could lead to a weakening of the rule of law. Policies against organised crime must strike an optimal balance as to achieve the maximal weakening of criminal organisations at the lowest social cost possible.

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Fighting criminal organisations requires governments to choose from alternative strategies for which the consequences are not always known. A commonly used policy against criminal enterprises is the removal of leadership, known as ‘decapitation’. Once authorities capture high-ranking members, the organisation loses leadership, which entails a bid for control among remaining members (Phillips, 2015).

This policy may be attractive because with a single action governments can cripple large criminal enterprises. But decapitations can have negative outcomes as well. For example, the ensuing power struggle can lead to violence that can extend to bystanders, increasing fear among the general population.

This research is the first to study the labour market impact of the policy. To do so, the author merges data on cartel locations in México (Coscia and Rios, 2017) with several datasets containing information on the activities of establishments and on labour market outcomes: The National Employment Survey, Firm Economic Census and IMSS administrative dataset. This paper is one of the first to use the new methodology by Busso et al (2018) to construct a 15 year-long firm panel for all Mexican establishments.

He then compares individuals and firms’ outcomes in cartel regions against non-cartel regions, before and after the capture of leaders.

The study finds that after the capture of leadership, regions with cartel presence saw a decline of 5.3% in wages, which is partially explained by a switch from paid to unpaid work. This timing coincided with an increase in violence (Lindo and Padilla-Romo, 2018), but the wage effect was not confined to municipalities with large increases in violence.

In fact, thanks to the CIDEPPD (Centro de Investigación y Docencia Económica Program of Drug Policies) database, which contains information on all recorded events of the ‘War on Drugs’ in Mexico, the study can rule out the impact of other policies targeting cartels (like crop eradication). The reduction in paid employment is partially explained by an informalisation of the local labour market.

The author also explores this phenomenon from a firm perspective. He finds that decapitation caused a decrease in the number of establishments in several industries. Moreover, it seems that young and informal firms were more likely to be destroyed. Even surviving establishments saw a decrease in their revenue, with restaurants and hotels being particularly affected.

Among the possible reasons for the decrease in firm revenue, there are two that stand out: an increase in the number of attacks on firms and an increase in fear. In the first case, to gather resources, cartels increased robberies of firms; while in the second, consumers avoided being exposed to violence by reducing foot traffic that could have led to decreased spending.

While the study finds that decapitation can have adverse effects on local labour markets, leaving organised crime unchecked could have adverse effects of its own through a weakening of institutions.

Thus, governments face a difficult problem: on the one hand, a direct and strong fight against these organisations could lead to an increase in violence and adverse effects on employment; on the other hand, allowing criminal syndicates to increase in strength could lead to a weakening of the rule of law.

As a result, the design of policies against organised crime must strike an optimal balance as to achieve the maximal weakening of criminal organisations at the lowest social cost possible. Developing new policies that minimise the negative outcomes of fighting crime is more needed than ever.

Daniel Osuna Gomez

Bank of Mexico | dosuna@banxico.org.mx

Authors' note: The views expressed here are those of the author and do not necessarily represent those of Banco de México or its Board of Governors.

‘The Impact of the Decapitation of Criminal Organisations on the Labor Market: Evidence from México’ by Daniel Osuna-Gómez

Further reading:

Busso, Matías, Fentanes, Oscar y Santiago Levy. 2018. The Longitudinal Linkage of Mexico’s Economic Census 1999-2014. IDB Technical Note IDB-TN-1477