The Impact of Incarceration on Employment, Earnings, and Tax Filing

We study the effect of incarceration on wages, self-employment, and taxes and transfers in North Carolina and Ohio using two quasi-experimental research designs: discontinuities in sentencing guidelines and random assignment to judges. Across both states, incarceration generates short-term drops in economic activity while individuals remain in prison. As a result, a year-long sentence decreases cumulative earnings over five years by 13%. Beyond five years, however, there is no evidence of lower employment, wage earnings, or self-employment in either state, as well as among defendants with no prior incarceration history. These results suggest that upstream factors, such as other types of criminal justice interactions or pre-existing labor market detachment, are more likely to be the cause of low earnings among the previously incarcerated, who we estimate would earn just $5,000 per year on average if spared a prison sentence.