SuperFreakonomics

by Steven D. Levitt

  How do the Chicago street prostitutes price-discriminate? As Venkatesh learned, they use different pricing strategies for white and black customers. When dealing with blacks, the prostitutes usually name the price outright to discourage any negotiation. (Venkatesh observed that black customers are more likely than whites to haggle—perhaps, he reasoned, because they’re more familiar with the neighborhood and therefore know the market better.) When doing business with white customers, meanwhile, the prostitute makes the man name a price, hoping for a generous offer. As evidenced by the black-white price differential in the data, this strategy seems to work pretty well.

  Other factors can knock down the price customers pay a Chicago prostitute. For instance:

  The drug discount isn’t much of a shock considering that most of the prostitutes are drug addicts. The outdoors discount is partially a time discount because tricks performed outdoors tend to be faster. But also, prostitutes charge more for an indoor trick because they usually have to pay for the indoor space. Some women rent a bedroom in someone’s home or keep a mattress in the basement; others use a cheap motel or a dollar store that has closed for the night.

  The small discount for condom use is surprising. Even more surprising is how seldom condoms are used: less than 25 percent of the time even when counting only vaginal and anal sex. (New customers were more likely to use condoms than repeat customers; black customers were less likely than others.) A typical Chicago street prostitute could expect to have about 300 instances of unprotected sex a year. The good news, according to earlier research, is that men who use street prostitutes have a surprisingly low rate of HIV infection, less than 3 percent. (The same is not true for male customers who hire male prostitutes; their rate is above 35 percent.)

  So a lot of factors influence a prostitute’s pricing: the act itself, certain customer characteristics, even the location.

  But amazingly, prices at a given location are virtually the same from one prostitute to the next. You might think one woman would charge more than another who is less desirable. But that rarely happens. Why?

  The only sensible explanation is that most customers view the women as what economists call perfect substitutes, or commodities that are easily interchanged. Just as a shopper in a grocery store may see one bunch of bananas as pretty much identical to the rest, the same principle seems to hold true for the men who frequent this market.

  One surefire way for a customer to get a big discount is to hire the prostitute directly rather than dealing with a pimp. If he does, he’ll get the same sex act for about $16 less.

  This estimate is based on data from the prostitutes in Roseland and West Pullman. The two neighborhoods are located next to each other and are similar in most regards. But in West Pullman, the prostitutes used pimps, whereas those in Roseland did not. West Pullman is slightly more residential, which creates community pressure to keep prostitutes off the streets. Roseland, meanwhile, has more street-gang activity. Even though Chicago’s gangs don’t typically get involved in pimping, they don’t want anyone else horning in on their black-market economy.

  This key difference allows us to measure the impact of the pimp (henceforth known as the pimpact). But first, here’s an important question: how can we be sure the two populations of prostitutes are in fact comparable? Perhaps the prostitutes who work with pimps have different characteristics than the others. Maybe they’re savvier or less drug addicted. If that were the case, we’d merely be measuring two different populations of women rather than the pimpact.

  But as it happened, many of the women in Venkatesh’s study went back and forth between the two neighborhoods, sometimes working with a pimp and sometimes solo. This enabled us to analyze the data in such a way that isolates the pimpact.

  As just noted, customers pay about $16 more if they go through a pimp. But the customers who use pimps also tend to buy more expensive services—no manual stimulation for these gents—which further bumps up the women’s wages. So even after the pimps take their typical 25 percent commission, the prostitutes earn more money while turning fewer tricks:

  The secret to the pimps’ success is that they go after a different clientele than the street prostitutes can get on their own. As Venkatesh learned, the pimps in West Pullman spent a lot of their time recruiting customers, mostly white ones, in downtown strip clubs and the riverboat casinos in nearby Indiana.

  But as the data show, the pimpact goes well beyond producing higher wages. A prostitute who works with a pimp is less likely to be beaten up by a customer or forced into giving freebies to gang members.

  So if you are a street prostitute in Chicago, using a pimp looks to be all upside. Even after paying the commission, you come out ahead on just about every front. If only every agent in every industry provided this kind of value.

  Consider a different sales environment: residential real estate. Just as you can sell your body with or without the aid of a pimp, you can sell your house with or without a Realtor. While Realtors charge a much lower commission than the pimps—about 5 percent versus 25 percent—the Realtor’s cut is usually in the tens of thousands of dollars for a single sale.

  So do Realtors earn their pay?

  Three economists recently analyzed home-sales data in Madison, Wisconsin, which has a thriving for-sale-by-owner market (or FSBO, pronounced “FIZZ-bo”). This revolves around the website FSBOMadison.com, which charges homeowners $150 to list a house, with no commission when the home is sold. By comparing FSBO sales in Madison with Realtor-sold homes in Madison along several dimensions-price, house and neighborhood characteristics, time on market, and so on—the economists were able to gauge the Realtor’s impact (or, in the interest of symmetry, the Rimpact).

  What did they find?

  The homes sold on FSBOMadison.com typically fetched about the same price as the homes sold by Realtors. That doesn’t make the Realtors look very good. Using a Realtor to sell a $400,000 house means paying a commission of about $20,000—versus just $150 to FSBOMadison.com. (Another recent study, meanwhile, found that flat-fee real-estate agents, who typically charge about $500 to list a house, also get about the same price as full-fee Realtors.)

  But there are some important caveats. In exchange for the 5 percent commission, someone else does all the work for you. For some home sellers, that’s well worth the price. It’s also hard to say if the Madison results would hold true in other cities. Furthermore, the study took place during a strong housing market, which probably makes it easier to sell a home yourself. Also, the kind of people who choose to sell their houses without a Realtor may have a better business head to start with. Finally, even though the FSBO homes sold for the same average price as those sold by Realtors, they took twenty days longer to sell. But most people would probably consider it worth $20,000 to live in their old home for an extra twenty days.

  A Realtor and a pimp perform the same primary service: marketing your product to potential customers. As this study shows, the Internet is proving to be a pretty powerful substitute for the Realtor. But if you’re trying to sell street prostitution, the Internet isn’t very good—not yet, at least—at matching sellers to buyers.

  So once you consider the value you get for each of these two agents, it seems clear that a pimp’s services are considerably more valuable than a Realtor’s. Or, for those who prefer their conclusions rendered mathematically:

  PIMPACT > RIMPACT

  During Venkatesh’s study, six pimps managed the prostitution in West Pullman, and he got to know each of them. They were all men. In the old days, prostitution rings in even the poorest Chicago neighborhoods were usually run by women. But men, attracted by the high wages, eventually took over—yet another example in the long history of men stepping in to outearn women.

  These six pimps ranged in age from their early thirties to their late forties and “were doing pretty well,” Venkatesh says, making roughly $50,000 a year. Some also held legit jobs—car mechanic or store manager—and most owned their homes.
None were drug addicts.

  One of their most important roles was handling the police. Venkatesh learned that the pimps had a good working relationship with the police, particularly with one officer, named Charles. When he was new on the beat, Charles harassed and arrested the pimps. But this backfired. “When you arrest the pimps, there’ll just be fighting to replace them,” Venkatesh says, “and the violence is worse than the prostitution.”

  So instead, Charles extracted some compromises. The pimps agreed to stay away from the park when kids were playing there, and to keep the prostitution hidden. In return, the police would leave the pimps alone—and, importantly, they wouldn’t arrest the prostitutes either. Over the course of Venkatesh’s study, there was only one official arrest of a prostitute in an area controlled by pimps. Of all the advantages a prostitute gained by using a pimp, not getting arrested was one of the biggest.

  But you don’t necessarily need a pimp to stay out of jail. The average prostitute in Chicago will turn 450 tricks before she is arrested, and only 1 in 10 arrests leads to a prison sentence.

  It’s not that the police don’t know where the prostitutes are. Nor have the police brass or mayor made a conscious decision to let prostitution thrive. Rather, this is a graphic example of what economists call the principal-agent problem. That’s what happens when two parties in a given undertaking seem to have the same incentives but in fact may not.

  In this case, you could think of the police chief as the principal. He would like to curtail street prostitution. The cop on the street, meanwhile, is the agent. He may also want to curtail prostitution, at least in theory, but he doesn’t have a very strong incentive to actually make arrests. As some officers see it, the prostitutes offer something far more appealing than just another arrest tally: sex.

  This shows up loud and clear in Venkatesh’s study. Of all the tricks turned by the prostitutes he tracked, roughly 3 percent were freebies given to police officers.

  The data don’t lie: a Chicago street prostitute is more likely to have sex with a cop than to be arrested by one.

  It would be hard to overemphasize how undesirable it is to be a street prostitute—the degradation, the risk of disease, the nearly constant threat of violence.

  Nowhere were the conditions as bad as in Washington Park, the third neighborhood in Venkatesh’s study, which lies about six miles north of Roseland and West Pullman. It is more economically depressed and less accessible to outsiders, especially whites. The prostitution is centered around four locations: two large apartment buildings, a five-block stretch of busy commercial street, and in the park itself, a 372-acre landmark designed in the 1870s by Frederick Law Olmsted and Calvert Vaux. The prostitutes in Washington Park work without pimps, and they earn the lowest wages of any prostitutes in Venkatesh’s study.

  This might lead you to think that such women would rather be doing anything else but turning tricks. But one feature of a market economy is that prices tend to find a level whereby even the worst conceivable job is worth doing. As bad off as these women are, they would seem to be worse off without prostitution.

  Sound absurd?

  The strongest evidence for this argument comes from an unlikely source: the long-loved American tradition known as the family reunion. Every summer around the Fourth of July holiday, Washington Park is thronged with families and other large groups who get together for cookouts and parties. For some of these visitors, catching up with Aunt Ida over lemonade isn’t quite stimulating enough. It turns out that the demand for prostitutes in Washington Park skyrockets every year during this period.

  And the prostitutes do what any good entrepreneur would do: they raise prices by about 30 percent and work as much overtime as they can handle.

  Most interestingly, this surge in demand attracts a special kind of worker—a woman who steers clear of prostitution all year long but, during this busy season, drops her other work and starts turning tricks. Most of these part-time prostitutes have children and take care of their households; they aren’t drug addicts. But like prospectors at a gold rush or Realtors during a housing boom, they see the chance to cash in and jump at it.

  As for the question posed in this chapter’s title—How is a street prostitute like a department-store Santa?—the answer should be obvious: they both take advantage of short-term job opportunities brought about by holiday spikes in demand.

  We’ve already established that demand for prostitutes is far lower today than it was sixty years ago (if offset a bit by holiday surges), in large part because of the feminist revolution.

  If you found that surprising, consider an even more unlikely victim of the feminist revolution: schoolchildren.

  Teaching has traditionally been dominated by women. A hundred years ago, it was one of the few jobs available to women that didn’t involve cooking, cleaning, or other menial labor. (Nursing was another such profession, but teaching was far more prominent, with six teachers for every nurse.) At the time, nearly 6 percent of the female workforce were teachers, trailing only laborers (19 percent), servants (16 percent), and laundresses (6.5 percent). And by a large margin it was the job of choice among college graduates. As of 1940, an astonishing 55 percent of all college-educated female workers in their early thirties were employed as teachers.

  Soon after, however, opportunities for smart women began to multiply. The Equal Pay Act of 1963 and the Civil Rights Act of 1964 were contributing factors, as was the societal shift in the perception of women’s roles. As more girls went off to college, more women emerged ready to join the workforce, especially in the desirable professions that had been largely off-limits: law, medicine, business, finance, and so on. (One of the unsung heroes of this revolution was the widespread use of baby formula, which allowed new mothers to get right back to work.)

  These demanding, competitive professions offered high wages and attracted the best and brightest women available. No doubt many of these women would have become schoolteachers had they been born a generation earlier.

  But they didn’t. As a consequence, the schoolteacher corps began to experience a brain drain. In 1960, about 40 percent of female teachers scored in the top quintile of IQ and other aptitude tests, with only 8 percent in the bottom. Twenty years later, fewer than half as many were in the top quintile, with more than twice as many in the bottom. It hardly helped that teachers’ wages were falling significantly in relation to those of other jobs. “The quality of teachers has been declining for decades,” the chancellor of New York City’s public schools declared in 2000, “and no one wants to talk about it.”

  This isn’t to say that there aren’t still a lot of great teachers. Of course there are. But overall teacher skill declined during these years, and with it the quality of classroom instruction. Between 1967 and 1980, U.S. test scores fell by about 1.25 grade-level equivalents. The education researcher John Bishop called this decline “historically unprecedented,” arguing that it put a serious drag on national productivity that would continue well into the twenty-first century.

  But at least things worked out well for the women who went into other professions, right?

  Well, sort of. As we wrote earlier, even the best-educated women earn less than their male counterparts. This is especially true in the high-flying financial and corporate sectors—where, moreover, women are vastly underrepresented. The number of female CEOs has increased roughly eightfold in recent years, but women still hold less than 1.5 percent of all CEO positions. Among the top fifteen hundred companies in the United States, only about 2.5 percent of the highest-paying executive positions are held by women. This is especially surprising given that women have earned more than 30 percent of all the master’s in business administration (MBA) degrees at the nation’s top colleges over the past twenty-five years. Their share today is at its highest yet, 43 percent.

  The economists Marianne Bertrand, Claudia Goldin, and Lawrence Katz tried to solve this wage-gap puzzle by analyzing the career outcomes of more than 2,000 male and female
MBAs from the University of Chicago.

  Their conclusion: while gender discrimination may be a minor contributor to the male-female wage differential, it is desire—or the lack thereof—that accounts for most of the wage gap. The economists identified three main factors:

  Women have slightly lower GPAs than men and, perhaps more important, they take fewer finance courses. All else being equal, there is a strong correlation between a finance background and career earnings.

  Over the first fifteen years of their careers, women work fewer hours than men, 52 per week versus 58. Over fifteen years, that six-hour difference adds up to six months’ less experience.

  Women take more career interruptions than men. After ten years in the workforce, only 10 percent of male MBAs went for six months or more without working, compared with 40 percent of female MBAs.

  The big issue seems to be that many women, even those with MBAs, love kids. The average female MBA with no children works only 3 percent fewer hours than the average male MBA. But female MBAs with children work 24 percent less. “The pecuniary penalties from shorter hours and any job discontinuity among MBAs are enormous,” the three economists write. “It appears that many MBA mothers, especially those with well-off spouses, decided to slow down within a few years following their first birth.”

  This is a strange twist. Many of the best and brightest women in the United States get an MBA so they can earn high wages, but they end up marrying the best and brightest men, who also earn high wages—which affords these women the luxury of not having to work so much.

  Does this mean the women’s investment of time and money in pursuing an MBA was poorly spent? Maybe not. Perhaps they never would have met such husbands if they hadn’t gone to business school.