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Freakonomics: Vice Work If You Can Get It
From The Sunday NY Times October 18, 2009 Freakonomics returns: vice work if you can get it Steven Levitt and Stephen Dubner, authors of the bestselling Freakonomics, return with a new book of offbeat explanations of how society works. Here they look at prostitution and reveal just how a call girl can earn far more by actually working far less Recommend? (5) Image :1 of 3 One afternoon not long ago, a 29-year-old woman named LaSheena sat on the hood of an SUV outside a housing project on the South Side of Chicago. She had a beaten-down look in her eyes, but otherwise seemed youthful, her pretty face framed by straightened hair. LaSheena was talking about how she earns her living. She described four main streams of income: "boosting", "roosting", cutting hair and turning tricks. "Boosting", she explained, is shoplifting and selling the swag. "Roosting" means serving as a lookout for the local street gang that sells drugs. Which job is the worst of the four? "Turning tricks," she says, with no hesitation. Related Links Why? "'Cause I don't really like men. I guess it bothers me mentally." And what if prostitution paid twice as much? "Would I do it more?" she asks. "Yeah!" In a chic neighbourhood of Chicago, just a few miles from where street prostitutes like LaSheena work, lives someone who makes more money than she ever thought possible. Her name is Allie, and she is also a prostitute. She has found, however, that she doesn't have to work more to earn more. In fact, the less she works, the more she earns. How so? Throughout history, it has invariably been easier to be male than female. Yes, this is an overgeneralisation and yes, there are exceptions, but by any important measure, women have had it rougher than men. Even though men handled most of the warfare, hunting and brute-force labour, women had a shorter life expectancy. Women have finally overtaken men in life expectancy, thanks mainly to medical improvements surrounding childbirth; and, especially in the world's developed nations, women's lives have improved dramatically. There is no comparing the prospects of a girl in 21st-century America or Britain or Japan with her counterpart from a century or two ago. In any arena you look - education, legal and voting rights, career opportunities and so on - it is far better to be a woman today than at any other point in history. And yet there is still a considerable economic price to pay for being a woman. The economists Claudia Goldin and Lawrence Katz found that women who went to Harvard earned less than half as much as the average Harvard man. Even when the analysis included only full-time employees and was controlled for other variables, Goldin and Katz found that the Harvard women still earned about 30% less. There is one labour market women have always dominated: prostitution. Its business model is built upon a simple premise. Since time immemorial and all over the world, men have wanted more sex than they could get for free. So what inevitably emerges is a supply of women who, for the right price, are willing to satisfy this demand. But what is the right price? Sudhir Venkatesh, a sociologist at Columbia University in New York, spent his graduate school years in Chicago, embedding himself with a street gang that practically ran a South Side neighbourhood. Along the way, he became an authority on the neighbourhood's underground economy, and began collecting data on the local prostitutes. Knowing that traditional survey methods don't necessarily produce reliable results for a sensitive topic like prostitution, Venkatesh hired trackers to stand on street corners or sit in brothels with the prostitutes, directly observing some facets of their transactions and gathering more intimate details from them as soon as the customers were gone. Most of the trackers were former prostitutes - an important credential because such women were more likely to get honest responses. Venkatesh also paid the prostitutes for participating in the study. If they were willing to have sex for money, he reasoned, surely they'd be willing to talk about having sex for money. And they were. It turns out that the typical street prostitute in Chicago works 13 hours a week, performing 10 sex acts during that period, and earns an hourly wage of approximately $27. So her weekly take-home pay is roughly $350. This includes an average of $20 that a prostitute steals from her customers and drugs accepted in lieu of cash. Their income of roughly $18,000 a year is next to nothing compared with what even low-rent prostitutes in Chicago earned 100 years ago. A woman working in a "dollar house" took home the equivalent of about $76,000 today annually, while prostitutes at the Everleigh Club, the city's top brothel, could earn the equivalent of about $430,000. Why has the prostitute's wage fallen so far? Because demand has fallen dramatically. Not the demand for sex. That is still robust. But prostitution, like any industry, is vulnerable to competition. Who poses the greatest competition to a prostitute? Simple: any woman who is willing to have sex with a man for free. It is no secret that sexual mores have evolved substantially in recent decades. The phrase "casual sex" didn't exist a century ago (to say nothing of "friends with benefits"). Sex outside marriage was much harder to come by and carried significantly higher penalties than it does today. Imagine a young man, just out of college but not ready to settle down, who wants to have some sex. In decades past, prostitution was a likely option. While relatively expensive in the short term, it provided good long-term value because it didn't carry the potential costs of an unwanted pregnancy or a marriage commitment. At least 20% of American men born between 1933 and 1942 had their first sexual intercourse with a prostitute. Now imagine that same young man 20 years later. The shift in sexual mores has given him a much greater supply of unpaid sex. In his generation, only 5% of men lose their virginity to a prostitute. It's not that he and his friends are saving themselves for marriage. More than 70% of the men in his generation have sex before they marry, compared with just 33% in the earlier generation. So premarital sex emerged as a viable substitute for prostitution. And as the demand for paid sex decreased, so too did the wage of the people who provide it. If prostitution were a typical industry, it might have hired political lobbyists to fight against the encroachment of premarital sex. They would have pushed to have premarital sex criminalised or, at the very least, heavily taxed. Alas, the prostitution industry holds little sway in Washington's corridors of power - despite, it should be said, its many, many connections with men of high government office. This explains why the industry's fortunes have been so badly buffeted by the naked winds of the free market. Now let's see how Allie makes so much more for doing so much less. She grew up in a large and largely dysfunctional family in Texas and left home to join the military, where she trained in electronics. When she rejoined the civilian world seven years later, she took a job in computer programming with one of the world's largest corporations and married a mortgage broker. Her life was a success, but it was also - well, boring. She got divorced (the couple had no children) and remarried, but this marriage also failed. Her career as a computer programmer wasn't going much better. Allie was smart, capable, technically sophisticated, and she also happened to be physically attractive, a curvaceous and friendly blonde whose attributes were always well appreciated in her corporate setting. But she just didn't like working all that hard. So she became an entrepreneur, launching a one-woman business that enabled her to work just 10 or 15 hours a week and earn five times her old salary. She fell into the profession by accident, or at least for a lark. Her family was devout Southern Baptist, and Allie had grown up "very strait-laced", she says. But as a young divorcée, she started visiting online dating sites - she liked men, and she liked sex - and just for fun listed "escort" on her profile. "I mean, it was so instantaneous," she recalls. "I just thought I'd put it up and see what happens." Her computer was instantly flooded with replies. "I started hitting minimise, minimise, minimise, just so I could keep up!" She arranged to meet a man at two o'clock on a weekday afternoon at a hotel, in the southwest corner of its car park. He'd be driving a black Mercedes. Allie had no idea what to charge. She was thinking about $50. He was a dentist - physically unintimidating, married and perfectly kind. Once inside the room, Allie undressed nervously. She can no longer recall the particulars of the sex ("It's all a big blur by this point," she says) but does remember that "it was nothing really kinky or anything". When they were done, the man put some money on the dresser. "You've never done this before, have you?" he asked. Allie tried to fib, but it was useless. "Okay," he said, "this is what you need to do." He began to lecture her. She had to be more careful; she shouldn't be willing to meet a stranger in a car park; she needed to know something in advance about her clients. "He was the perfect first date," Allie says. "To this day, I remain grateful." Once he left the room, Allie counted the cash on the dresser: $200. "I'd been giving it away for years, and so the fact that someone was going to give me even a penny - well, that was shocking." She was immediately tempted to take up prostitution full-time, but she was worried her family and friends would find out. So she eased into it, booking mainly out-of-town liaisons. She curtailed her programming hours but even so found the job stultifying. That's when she decided to move to Chicago. Yes, it was a big city, which Allie found intimidating, but unlike New York or Los Angeles, it was civil enough to make a southern girl feel at home. She built a website (those computer skills came in handy) and, through intensive trial and error, determined which erotic services sites would help her attract the right kind of client and which ones would waste her ad dollars. (The winners were Eros.com and BigDoggie.net.) Running a one-woman operation held several advantages, the main one being that she didn't have to share her revenues with anyone. In the old days, Allie probably would have worked for someone like the Everleigh sisters, who paid their girls handsomely, but took enough off the top to make themselves truly rich. The internet let Allie be her own madam and accumulate the riches for herself. Much has been said of the internet's awesome ability to "disintermediate" - to cut out the agent or middleman - in industries like travel, real estate, insurance and the sale of stocks and bonds. But it is hard to think of a market more naturally suited to disintermediation than high-end prostitution. The downside was that Allie had no one but herself to screen potential clients and ensure they wouldn't beat her up or rip her off. She hit upon a solution that was as simple as it was smart. When a new client contacted her online, she wouldn't book an appointment until she had secured his real name and his work telephone number. Then she'd call him the morning of their date, ostensibly just to say how excited she was to meet him. But the call also acknowledged that she could reach him at will and, if something were to go wrong, she could storm his office. "Nobody wants to see the ‘crazy ho' routine," she says with a smile. To date, Allie has resorted to this tactic only once, after a client paid her in counterfeit cash. When Allie visited his office, he promptly located some real money. She saw clients in her apartment, mainly during the day. Most of them were middle-aged white men, 80% of whom were married, and they found it easier to slip off during work hours than explain an evening absence. Allie loved having her evenings free to read, go to the movies, or just relax. She set her fee at $300 an hour - that's what most other women of her calibre seemed to be charging - with a few discount options: $500 for two hours or $2,400 for a 12-hour sleepover. About 60% of her appointments were for a single hour. Her bedroom - "my office", she calls it with a laugh - is dominated by a massive Victorian four-poster, its carved mahogany pillars draped with an off-white silk crepe. One portly gentleman broke the bed not long ago. Allie didn't blame him. "I told him that the damn thing was already broken, and I was sorry I hadn't got it fixed." She is the kind of person who sees something good in everyone - and this, she believes, has contributed to her entrepreneurial success. She genuinely likes the men who come to her, and the men therefore like Allie even beyond the fact that she will have sex with them. Often, they bring gifts: a $100 gift certificate from Amazon; a nice bottle of wine (she Googles the label afterwards to determine the value); and, once, a new MacBook. The men sweet-talk her, and compliment her looks or the decor. They treat her, in many ways, as men are expected to treat their wives but often don't. Most women of Allie's pay grade call themselves "escorts". When Allie discusses her friends in the business, she simply calls them "girls". But she isn't fussy. "I like hooker, I like whore, I like them all," she says. "Come on, I know what I do, so I'm not trying to butter it up." Allie mentions one friend whose fee is $500 an hour. "She thinks she's nothing like the girls on the street giving blow jobs for $100, and I'm like, ‘Yes, honey, you're the same damn thing'." About this, Allie is probably wrong. Although she views herself as similar to a street prostitute, she has less in common with that kind of woman than she does with a trophy wife. Allie is essentially a trophy wife who is rented by the hour. She isn't really selling sex, or at least not sex alone. She sells men the opportunity to trade in their existing wives for a younger, more sexually adventurous version - without the trouble and long-term expense of actually having to go through with it. For an hour or two, she represents the ideal wife: beautiful, attentive, smart, laughing at your jokes and satisfying your lust. She is happy to see you every time you show up at her door. Your favourite music is already playing and your favourite drink is on ice. She will never ask you to take out the rubbish. Allie says she is "a little more liberal" than some prostitutes when it comes to satisfying a client's unusual request. There was, for instance, the fellow back in Texas who still flew her in regularly and asked her to incorporate some devices he kept in a briefcase in a session most people wouldn't even recognise as sex per se. But she categorically insists that her clients wear a condom. What if a client offered her $1m to have sex without a condom? Allie pauses to consider this question. Then, exhibiting a keen understanding of what economists call adverse selection, she declares that she still wouldn't do it - because any client crazy enough to offer $1m for a single round of unprotected sex must be so crazy that he should be avoided at all costs. But we still haven't explained how she came to earn more by doing less. When she started out in Chicago, at $300 an hour, the demand was nearly overwhelming. She took on as many clients as she could physically accommodate, working roughly 30 hours a week. She kept that up for a while, but once she paid off her car and built up some cash reserves, she scaled back to 15 hours a week. Even so, she began to wonder if one hour of her time was more valuable to her than another $300. As it was, a 15-hour workload generated more than $200,000 a year in cash. Eventually she raised her fee to $350 an hour. She expected demand to fall, but it didn't. So a few months later, she raised it to $400. Again, there was no discernible drop-off in demand. Allie was a bit peeved with herself. Plainly she had been charging too little the whole time. But at least she was able to strategically exploit her fee change by engaging in what economists call "price discrimination". She charged her favourite clients the old rate but told her less favoured clients that an hour now cost $400. In the business world, it isn't always possible to price-discriminate. At least two conditions must be met: Some customers must have clearly identifiable traits that place them in the willing-to-pay-more category. (If Allie's clients balked, she had a handy excuse to cut them loose. There were always more where they came from.) The seller must be able to prevent resale of the product, thereby destroying any arbitrage opportunities. (In the case of prostitution, resale is pretty much impossible.) If these circumstances can be met, most firms will profit from price discriminating whenever they can. Business travellers know this all too well, because they routinely pay three times more for a last-minute airline ticket than the holidaymaker in the next seat. It wasn't long before Allie raised her fee again to $450 an hour, and a few months later to $500. In the space of a couple of years, Allie had increased her price by 67%, and yet she saw practically no decrease in demand. Her price hikes revealed another surprise: the more she charged, the less actual sex she was having. At $300 an hour, she had a string of one-hour appointments with each man wanting to get in as much action as he could. But charging $500 an hour, she was often wined and dined - "a four-hour dinner date that ends with a 20-minute sexual encounter", she says, "even though I was the same girl, dressed the same, and had the same conversations as when I charged $300". She figured she may have just been profiting from a strong economy. This was during 2006 and 2007, which were go-go years for many of the bankers, lawyers and property developers she saw. But Allie had found that most people who bought her services were, in the language of economics, price insensitive. Demand for sex seemed relatively uncoupled from the broader economy. Street prostitutes like LaSheena might have the worst job in America. But for elite prostitutes like Allie, the circumstances are completely different: high wages, flexible hours and relatively little risk of violence or arrest. So the real puzzle isn't why someone like Allie becomes a prostitute, but rather why more women don't choose this career. Certainly, prostitution isn't for every woman. You have to like sex enough, and be willing to make some sacrifices, like not having a husband (unless he is very understanding, or very greedy). Still, these negatives just might not seem that important when the wage is $500 an hour. Indeed, when Allie confided to one longtime friend that she had become a prostitute and described her new life, it was only a few weeks before the friend joined Allie in the business. Allie has never had any trouble with the police, and doesn't expect to. The truth is that she would be distraught if prostitution were legalised, because her stratospherically high wage stems from the fact that the service she provides cannot be had legally. Allie was a shrewd entrepreneur who kept her overheads low, maintained quality control, learnt to price-discriminate, and understood well the market forces of supply and demand. She also enjoyed her work. But, all that said, Allie began looking for an exit strategy. She was in her early thirties by now and, while still attractive, she understood that her commodity was perishable. She felt sorry for older prostitutes who, like ageing athletes, didn't know when to quit. She had also grown tired of living a secret life. Her family and friends didn't know she was a prostitute, and the constant deception wore her out. The only people with whom she could be unguarded were other girls in the business, and they weren't her closest friends. She had saved money but not enough to retire. So she began casting about for her next career. She got her real-estate licence. The housing boom was in full swing, and it seemed pretty simple to make the transition out of her old job and into the new, since both allowed a flexible schedule. But too many other people had the same idea. And Allie was aghast when she realised she'd have to give half of her commission to the agency that employed her. That was a steeper cut than any pimp would dare take! Finally Allie realised what she really wanted to do: go back to college. She would build on everything she'd learnt by running her own business and, if all went well, apply this newfound knowledge to some profession that would pay an insanely high wage without relying on her own physical labour. Her chosen field of study? Economics, of course. Allie is not her real name, but all other facts about her are true. Over the past few years, we have both spent a considerable amount of time with her (all fully clothed), holding extensive interviews, reviewing her ledgers and attending the occasional guest lecture she delivered at the University of Chicago for Steve Levitt's class, The Economics of Crime. Several students said this was the best lecture they had in all their years at the university, which is both a firm testament to Allie's insights and a brutal indictment of Levitt and the other professors. © Steven D Levitt and Stephen J Dubner 2009 Extracted from Superfreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance by Steven D Levitt and Stephen J Dubner, to be published by Allen Lane on October 20 at £20. Copies can be ordered for £18, including postage, from The Sunday Times BooksFirst on 0845 271 2135 Steven Levitt and Stephen Dubner will be at the Peacock theatre, London, on Monday, November 9, at 6.30pm to talk about their book
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