Is Prostitution Counter-Cyclical?

Venkatesh posted in Slate a few weeks ago that the income elasticity for demand for prostitution was pretty small, since many prostitutes with whom he spoke reported business to be up during these hard economic times. I am skeptical, personally, but another article in the NY Daily News says that mid-priced prostitutes in NYC report brisk service right now, but that high priced escorts are struggling (the opposite, mind you, of what Venkatesh said.

The effect of recessions on prostitution is ambiguous theoretically. Here's my analysis. For the demand side, commercial travel will certainly be down as firms curtail such traveling. As a result, being away from a wife (one of the key determinants of demand) falls and with it demand for services as well. Likewise, incomes are falling - people will be laid off, housing prices are plummeting, and stock prices are in a nosedive. All together, we see real income and real wealth falling for households, which leaves less money to buy these services. Insofar as prostitution is a normal good, then we should expect in aggregate some decline.

This is not the end of the story, though, for the demand-side. Say that a man can choose between either sex with $1000/hr prostitute or sex with a $500/hr prostitute, as well as no commercial sex at all. It's true he will likely substitute to some no commercial sex, but he may also substitute towards the $500/hr prostitute just as well. And that, I think, is what is being reported by some NY-based prostitutes. For some prostitutes, they are seeing new clients who previously solicited higher-priced prostitutes but now cannot due to the hard times, and two, they are seeing some regular clients substituting towards cheaper services. On net, though, we could reasonably predict a decline in demand, which would imply both falling prostitute wages and falling services.

The supply side, though, complicates matters, for it is affected by the recession too. The most obvious effect is the entry of new prostitutes into this work. A common justification for entering prostitution are economic shocks - a divorce or losing one's job. Since both divorces and unemployment are common responses to the recession, it's not surprising to therefore suspect an increase in both and therefore a rightward shift in the supply curve. Insofar as we believe the Della Giusta, et al (forthcoming 2008 Journal of Population Economics) model of prostitution whereby increasing prostitution reduces the social norms that stigmatize prostitution in the first place (thus causing even more enrollment), then these recessionary effects on supply are likely larger than we might initially believe possible. The recession will send more women into the industry as they struggle to make ends meet due to their loss of jobs and recent divorces.

A leftward shift in demand and a rightward shift in supply therefore does one thing clearly and one thing unclearly. First, together, it should cause prices to fall. The leftward shift in demand pushes prostitution wages down, and the rightward shift in supply pushes them down even more. So that much should happen, we think. The second is ambiguous. Approximately how many prostitution services will be bought/sold as a result? The demand effects reduce services, but the supply effects increase them, making the net effect ambiguous.

There are maybe some ways to get at this stuff, but it's obviously very difficult too because of the huge obstacles facing economists collecting data on this group. Maybe the best we have to go on presently are the ethnographic observations of sociologists like Venkatesh or journalists. One way to reconcile the fact that some people are reporting good business while others are not is that maybe there are menu costs associated with prostitution that make the ability of prices to change impossible. After all, many mid and high-priced escorts advertise independently through various prostitution clearinghouse websites which post prices and services. Anecdotally, I've heard it's difficult to get compliance from system operators when prostitutes go and request that wages be changed. One woman told me her request to have her posted prices increased resulted in the website deleting her entire profile - including the hundreds of customer reviews she'd accumulated over several years. That may suggest prostitutes at that level have difficulty changing prices in the shortrun, which in turn would theoretically result in an imposed price floor such that prostitutes cannot immediately lower the price below the new market price. This would keep wages high, but create excess supply situations wherein prostitutes are idle and unable to work. Only those, maybe, who are new to the market and can select the correct wages will be able to do so, since they face no frictions. Whether this is a real problem or not is unclear. Again, we have no data so we don't know. But, it's a possibility.