Crime begets crime?: the effects of organised-crime homicides on the labour market and local criminal activity in Mexico

Abstract

The issue of drug trafficking has remained a major topic of public debate in recent years. Although policymakers have increasingly advocated for legalization, violence associated with the production, trafficking, and sale of narcotics continues to affect millions worldwide. This thesis studies how criminal organizations in Mexico respond to exogenous shocks in drug-related violence, using a municipal-level panel dataset from 2017 to 2023. The main hypothesis of this research is that a rise in drug-related violence generates a substitution effect across both illicit and legal domains: criminal actors shift their operations toward non–drug-related illegal activities (such as extortion, kidnapping, or vehicle theft), while also distorting labor market conditions through mechanisms like extortion, firm closures, and informalization. To identify causal effects, we employ a two-stage least squares (2SLS) approach with an instrumental variable derived from the quantity of drugs seized at the municipal level. We incorporate municipality and time fixed effects to address unobserved heterogeneity. The analysis explores the impact of these exogenous violence shocks on both the portfolio of crime and labor market outcomes. We find that, tentatively, violence shocks induce significant increases in non–cartel homicides (0.59% per predicted cartel homicide), domestic violence (0.88%), and opportunistic crimes such as fraud, sexual harassment, and vehicle theft, while extortion does not respond. In contrast, there is no statistically significant effect on formal or informal employment, suggesting that labor market reintegration remains highly inelastic once individuals enter illicit markets. These preliminary results underscore a robust criminal-substitution pattern without a corresponding return to the legal labor force.