Adult Entertainment and the Economy

It looks like the recession is hitting the adult entertainment sector pretty hard. A Detroit strip club lowered its table dance prices:

The topless club in the suburb of Warren -- where General Motors and Chrysler employ upwards of 20,000 people -- cut the cost of a table dance in half, from $20 to $10, in mid-November. The dancer gets all the money plus any tips, while food and drinks generate the club's income, general manager Kelly Sander said Tuesday.

Jon Jon's has lowered prices on drinks, but business is still down 50 percent from a year ago, Sander said. She now opens the club at 6 p.m. instead of 11 a.m.

"People can't afford to go out and have fun the way they used to," said Sander, whose club on Mound Road is located roughly halfway between GM's Technical Center and the GM Powertrain and Chrysler pickup truck assembly plants. "Of course it has to do with the economy."

The price cut in table dances, in which dancers perform at or on the patron's table, gave business a bit of a boost, Sander said, but added: "The regulars still come in but they don't stay as long. We do what we have to do keep going."

For Sander, that included pink-slipping one of her managers, who had worked 24 years for the club. "Everybody's in a pinch," she said. "I've got to make some cuts. It doesn't matter what kind of business it is."

Others adult-oriented businesses haven't been immune from the region's economic sickness, either. The Greektown Casino in downtown Detroit is in Chapter 11 bankruptcy, and the MGM Grand Detroit hotel and casino laid off several dozen employees in October.

Unemployment in Detroit and its closest suburbs, including Warren, was 8.8 percent in October, up from 8.3 percent in September.

Business has been unpredictable at the Booby Trap, a strip club on 8 Mile in Detroit, said general manager Brian Klinec.

"We're holding our own, let's put it that way," he said. "You've got your good nights and your bad nights. There are more bad nights. It's tough. People don't have disposable income right now."

Cheap drinks and football on TV remain big draws, Klinec said, but he expected more uncertainty in the near future: "After Jan. 1, everybody's got their bills to pay from the holidays."

Florida Helping Seniors

Florida is contemplating a pole tax to help seniors.

It’s not often that 77-year-old women and strip clubs are mentioned in the same breath, but state Rep. Rick Kriseman made just such a connection.

If passed, Kriseman’s “Personal Needs” bill would levy a $1 surcharge on admission to adult-entertainment clubs and similar businesses. The money would be diverted to the personal-needs allowances of seniors on Medicaid in nursing homes, state-run mental hospitals and developmentally disabled centers.

Kriseman, D-St. Petersburg, said the inspiration for the bill came from a 77-year-old female constituent of his.

“A woman by the name of Cecilia brought this problem to my attention,” Kriseman said via telephone last week from his St. Petersburg office. “Seniors have very little money for when they go on field trips … if they want to get their hair done. And when they go out to eat, they’re going to places like McDonald’s because they can’t afford anything else. That’s not a knock on McDonald’s, but it’s probably not the healthiest food for our seniors to eat.”

Kriseman said seniors on Medicaid currently receive $35 a month for all of their personal needs — toiletries, fast food, movie tickets — a figure that has remained the same for 20 years. Kriseman’s bill would double that allowance to $70 a month.

State Sen. Dave Aronberg, D-Greenacres, said he’d have to study the particulars more closely before passing final judgment, but that it sounds like a good idea on the surface.

“I’m normally not in favor of tax increases, but these difficult budgetary times call for creative solutions, and this is certainly worth discussing,” Aronberg said. “To me, it sounds like a racy Robin Hood — take from the strippers and give to the seniors.”

Kriseman’s original bill would have done just that. A closer look, however, showed that adult-entertainment services were already subject to a sales tax, so he amended the bill from taxing such services as lap dances to attaching a surcharge to admission fees.

“There are additional surcharges on things such as alcohol and cigarettes, and I thought that a $1 surcharge on admission to adult-entertainment clubs was high enough to fund the increase for seniors, yet not so high that club owners were going to argue that it would kill their business,” Kriseman said.

Kriseman’s bill defines adult-entertainment services as “private shower shows; peep shows; nude, semi-nude, or topless waitressing; lap, friction, couch, or table dancing; erotic massages or performance; nude photo sessions; and personal escort services.”

Representatives from Fantasy’s at the Beach in Fort Myers Beach, and Lookers and Escapades Gentlemen’s Club in Fort Myers could not be reached for comment.

Kriseman bristled when asked what he thought about his bill commonly being referred to as the “stripper tax.”

“I don’t care for it at all,” he said. “This is about personal needs and getting our seniors the dignity they deserve. It’s already been 20 years since the last increase, and to make them wait another year, two years or five years wouldn’t be right.”

To become law, Kriseman’s bill must be approved by the House and Senate. The next legislative session runs March 4 to May 2.

“If it doesn’t pass then, it won’t happen this year,” Kriseman said. “If that’s the case, I’ll reintroduce it at a later date.”

Strip Club Economics

Looks like someone is moving in on my research:

Freakynomics: An economic analysis of a gentlemen's club
Richard Feynman, Pacman Jones and Dennis Rodman-all great men, all leaders in their respective fields. All frequent strip club patrons.

Coincidence? I think not.

Strip clubs are, as defined by noted social commentator Chris Rock, "a place for all the married men of America." As a demographic with a decent amount of discretionary income, these men are the driving economic force behind the $5 billion strip club industry. This capital is concentrated in relatively few hands: A mid-sized club can generate $15,000-$20,000 in revenue on a Saturday night, and a stripper with an absolute advantage can earn nearly $1,000 in a night.

But how are these lucrative businesses structured? How equitable is the distribution of wealth? What is the marginal utility of an additional hour on the pole? Economists were dying to know, and as my capstone experience I elected to conduct a microeconomic positive analysis of the strip club industry.

What I discovered was a startlingly efficient business model revolving around independent contractors-the strippers. In contrast to regular employees, strippers retain more control over hours worked, jobs accepted and the quality of their performance. Cinnamon, a dancer at a local gentlemen's club, gave me some hard data about strippers' tax requirements.

"As independent contractors we're required to fill out 1099-MISCs," she said. "The paperwork's a breeze and we can deduct any work-related expenses, like tear-away pants and 8-inch glass heels."

Because the clubs provide the stage area and any private rooms utilized, many require payment from strippers at the onset of the evening. The strippers, in turn, keep any and all tips. The initial direction of the cash flow sheds light on two elementary paradoxes evident in all strip clubs.

1) The ugly stripper paradox. The club has an incentive to get as many dancers on the stage as possible, as a part of their revenue is directly proportional to the number of strippers stripping. Naturally, there is a scarcity of attractive women, ergo, ugly strippers. However, while the invisible hand of the market economy fills attractive strippers' g-strings with singles, it tends to gently usher ugly strippers offstage. The remaining ugly strippers are a product of asymmetrical information. There is a finite time most men have at a strip club, so they might settle for a less attractive stripper if they don't know a more attractive one is just a few songs away.

2) The over-enthusiastic stripper paradox. We've all seen them-dedicated strippers who literally work their pants off for any dollar they can get. What's driving these women, in addition to professional pride, is the expense of working. If the stripper makes a $30 payment at the beginning of the night, then most of her first hour would be spent just getting back into the green.

Rational people respond to incentives, so having strippers start their shift with a deficit gives them strong encouragement to dance the night away. This effect is magnified for average-looking strippers, who don't garner as much in tips, and over-enthusiastic strippers tend to be average-looking.

Clubs also draw revenue from cover charges and the sale of complementary goods such as alcohol and cigars. Though the clubs' independent-contractor relationship with their strippers somewhat limits their legal liability, in most cases, clubs hire bouncers to maintain a positive working environment. Bouncers are paid at a flat, hourly rate, and in some cases the strippers are also required to tip them at the end of the shift.

Demand for strip clubs seems fairly inelastic, as moves by the states of Texas and Nevada to tax strip clubs (sometimes by 25-30 percent) have been met with little industry resistance (this also indicates that strip club tax rates are currently on the upward-sloping side of the Laffer curve). The customer's relative purchasing power also has little effect on strip club attendance-the wealthy visit just as often as the poor. However, price discrimination (usually having a weekday college or trucker night) is often utilized to increase market penetration and increase consumer surplus. Ultimately, though, strip clubs market luxury goods; holistically these facts suggest a kinked demand curve.

Although this article provides a solid introduction to the economic workings of the strip club industry, its length means it cannot begin to reflect all the conclusions I've made in my hours of (rather expensive) fieldwork, and by no means should it be taken as the 21st century's first definitive work on stripper economics.

Rather, this article was meant merely to arouse interest in the subject and provide a springboard for future studies. Important questions clearly remain: How slim is the profit margin of a club that opens at noon on a Monday? Would Washington University benefit from adopting the independent contractor business model? What are the effects of strip clubs on substitute goods such as meaningful relationships and pornography? If nothing else, it would probably do everyone good to consider the trade-offs of taking it off.

Prohibition Never Works

Making something illegal does not eliminate the demand. And it often leads to an increase in other illegal activities as well. For example, make strip clubs illegal, and you'll have underground clubs pop up, but the underground clubs will likely also offer other illegal services, like prostitution. The lesson? Keep strip clubs legal, regulate them, and you'll be better off.

Here that Toledo?

Associated Press - February 3, 2008 1:55 PM ET
Secret nightclubs open as strip club restrictions go into effect
CLEVELAND (AP) - Police say underground nightclubs where patrons can smoke freely and watch strippers after midnight have opened in some of Cleveland's residential neighborhoods since the state began enforcing new restrictions on strip clubs and public smoking last year.

Some of the nightclubs, also called "smokehouses," offer customers the opportunity to have sex with prostitutes.

Informants have told police that patrons are mostly white suburban men. Customers bring their own liquor, cigarettes and cigars.

Cleveland police Detective Tom Shoulders says the smokehouses are comparable to the illegal gin houses, or "speakeasys" that operated during Prohibition in the 1920s and early 1930s.

Independent Contractors

Most Strippers are classified as Independent Contractors, and they pay a stage fee to work at the club. I'll let you read the IRS FAQ, or the 20 Factor Test of the IRS, to see how you might classify them. You can also read the Fair Labor Standards Act. It seems as a lawyer in Tuscon is trying to change this by enlisting some dancers in Vegas in a class action suit:

The Nevada Supreme Court has given a go-ahead for a class-action lawsuit by an Arizona lawyer who wants Las Vegas strippers classified as club employees and paid wages by the owners of clubs where they work.

Many of the estimated 10,000 strippers in Las Vegas pay a fee to dance at clubs and sign agreements classifying themselves as independent contractors. They get no pay or benefits and earn only tips.

A panel of high court justices ruled 3-0 on Thursday that lawyer Mick Rusing of Tucson can bring a class-action lawsuit on behalf of strippers seeking to change that arrangement.

``This is going to force employers to stop living off the backs of these women,'' said Sean Brearcliffe, a lawyer at Rusing's firm. ``Some of the clubs don't pay them anything and force them to pay as much as $50 to $100 per hour out of their tips. Nevada law does not let employers take tips earned by their employees.''

Brearcliffe said that in coming months he plans to file a class-action lawsuit in Clark County District Court to force strip clubs to hire dancers as they do other employees.

If a class-action lawsuit succeeds, it will allow dancers to keep their tips and receive wages, Brearcliffe said. Clubs will have to raise revenue through higher entrance fees, drink prices and other means if his law firm persuades a judge to prohibit the independent contractor arrangement, he said.

Brearcliffe said strippers will be notified of the litigation and their right to participate if his law firm brings action against the clubs where they work. The law firm would represent the strippers on a contingency-fee basis.

Without weighing in on who is right or wrong in this debate, let me quickly sketch the issues. The battle appears to be over money and risk. At the moment with the class action lawsuit, dancers are trying to shift some of the wage risk onto the club. Since the women provide the primary product this might make sense, however we should acknowledge what the clubs provide.

Remember there is an alternative market for stripping services. Look in any phone book and you will find ads for entertainers who will come to you to preform. So what is it that clubs provide? A market, a coordinated place where dancers and customers can meet. True the phone book provides a market as well, but there are inefficiencies involved. Transaction costs are higher in the phonebook market. Asymmetric information is a larger problem. You can't verify dancer quality in the phonebook market. Whereas in the club environment, there are better opportunities to reduce those asymmetries and better match dancers with customers, while also increasing the number of matches (and thus income of the dancers). And don't forget the improved pleasure of the customers.

Think about a bachelor party with heterogeneous preferences in terms of hair color of the dancer. In a phonebook market, even if they can request a certain hair color dancer likely they will be unable to fulfill all the preferences of the bachelor party participants. Economies of scale allow the clubs to solve this problem, by providing many girls.

The other problem clubs solve is security for dancers. Here again, economies of scale serve to reduce the security costs per dancer, while simultaneously increasing their level of security.

I have always found the labor issues in strip clubs fascinating. The women are the ones who hold and sell the primary experience good, yet the clubs deserve some of the revenues for the coordination and services they provide. So the club figures out a way to extract their share from the customers and the dancers. And this leads (in my view) to some very different and bizarre approaches.

Let me be clear, I am not weighing in on the question of whether they should or should not be classified as employees, I'm merely trying to think about the value clubs provide the dancers.

Texas Taxes

Somehow my preparation for the ASSA meetings distracted me from this piece of news:

In what some have dubbed the "pole tax," the Lone Star State will require its 150 or so strip clubs to collect a $5-per-customer levy, with most of the proceeds going to help rape victims. The tax goes into effect on New Year's Day.
....
The strip clubs are suing to block the tax, which state officials estimate will raise more than $40 million a year, based on liquor sales figures. If accurate, the estimate suggests at least 8 million people a year go to Texas strip clubs to get a lap dance or watch women pole-dance in a G-string.

I should point out the estimates imply there are 8 million visits, that does not mean 8 million unique visitors. From the NHSLS data I find the average number of visits for someone who has gone to a strip club is approximately 4.45 yielding 1,797,753 unique visitors. Though this may even be skewed upward as the median number of visits is 2.

Loonie Power

The rising value of the Canadian Dollar has led to cross border labor flows...of strippers.

With the Canadian dollar surging against the U.S. greenback, Robert Katzman is dealing with situations they don't teach in Economics 101.

The owner of five strip clubs in Detroit and Windsor, Ontario, says American dancers are heading to Canada to earn the strengthened Canadian currency, and Canadian customers are heading to Detroit because their dollars go further there. He's fighting back by advertising more in the U.S. and offering free limo service to get Detroit men to visit his Windsor clubs. [...]

Mr. Katzman, the Windsor strip-club owner, is philosophical. He says that, last year, 90% of his dancers were Canadians. About 200 of them drove down from Toronto and Montreal to take advantage of the U.S. dollars American men typically paid with.

This year, he has more American women dancing in his Canadian clubs -- about 160 -- than he has Canadians.

It's a nine-hour trip from Montreal to Windsor, Mr. Katzman explains, and with the loonie as strong as the dollar, the dancers can earn just as much money up there. "As a business decision, it just doesn't make sense," says Mr. Katzman.

Ovulating Strippers

Yes, you read that right. From the latest Economist, ovulating strippers make more money.

“BECAUSE academics may be unfamiliar with the gentlemen's club sub-culture, some background may be helpful to understand why this is an ideal setting for understanding real-world attractiveness effects of human female oestrus.”

No doubt readers of The Economist are equally unfamiliar with this sub-culture, but for Geoffrey Miller of the University of New Mexico, who penned the words above in a paper just published in Evolution and Human Behaviour, such clubs are a field site as revealing of human biology as the Serengeti is of the biology of lions and antelopes. Dr Miller is an evolutionary psychologist—and the author of the theory that the large brains of humans evolved to attract the opposite sex in much the same way that a peacock's tail does. His latest foray, into the flesh-pots of Albuquerque, is intended to investigate an orthodoxy of human mating theory. This is that in people, oestrus—the outward signs of ovulation—has been lost, so that men cannot tell when women are fertile.

This theory is based on the idea that in evolutionary terms it benefits women to disguise when they are fertile so that their menfolk will stick around all the time. Otherwise, the theory goes, a man might go hunting for alternative mating opportunities at moments when he knew that his partner was infertile and thus that her infidelity could not result in children.

However, this should result in an evolutionary arms race between the sexes, as men evolve ever-heightened sensitivity to signs of female fertility. Dr Miller thought lap-dancing clubs a good place to study this arms race, because male detection of female fertility cues would probably translate into an easily quantifiable signal, namely dollars earned. He therefore recruited some of the girls into his experiment, with a view to comparing the earnings of those on the Pill (whose fertility was thus suppressed) with those not on the Pill.

The results support the idea that if evolution has favoured concealed ovulation in women, it has also favoured ovulation-detection in men. The average earnings per shift of women who were ovulating was $335. During menstruation (when they were infertile) that dropped to $185—about what women on the Pill made throughout the month. The lessons are clear. A woman is sexier when she is most fertile. And if she wishes to earn a good living as a dancer, she should stay off the Pill.

The article is here.

The Curse of No Winners

Auction theory in economics suggests sometimes the winning bidder pays too much. They call the phenomenon The Winners Curse. Kind of like the LA Galaxy's recent acquisition of Becks.

In DC a "rare" license for a strip club went up for auction. There has been a moratorium on issuing new licenses for sometime (something which in fact is not legal, as we saw in Seattle).

But the $2 million minimum was too high, he decided, and neither he nor anyone else made a bid. Bidders also passed on two dance cages, complete with hydraulic-lift stages, that were going for $5,000 each. The auctioneer had more luck with the two 13-foot dance poles, which quickly went for $50 to Daniel Clark of Severn.

The license was being sold by club owner Ron Hunt, and as one of only 20 such licenses in the city, which has a moratorium on issuing additional licenses, it was considered a valuable asset.

"You're buying an asset that essentially can't be moved because there's so many approval hurdles to open a gentleman's club," Shulman said. "The city has been so developed with high-end real estate. People spend millions for a house, they don't want a gentleman's club next to it. There's no guarantee you could do it."

While the license allows an owner to open a club with nude dancing anywhere in the city that has commercial zoning, a club must sit at least 600 feet away from any schools, community centers and housing. Community members can protest the opening of such a club, and it must get approval from the District's Alcoholic Beverage Control Board

They want 2 million dollars? I'm pretty sure it would be cheaper to sue the city to end the moratorium. Besides, this site is one of the few remaining places that qualify under the zoning requirements. Which -by the way- are also illegal if they rule out every location within the municipality.