Prisoner labor is the productive effort contributed to the economy by those who are incarcerated. Traditionally, prison labor has tended to be inefficient, largely due to its being bureaucratically organized. Specifically, concerns about security have often been such a high priority that the freedom needed for prisoners to accomplish productive work has been mostly eliminated.
In prison, restrictions on individual liberty have the same harmful effective on output as in society in general, even if everyone is a worker; Henry Hazlitt notes, "Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. The war provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment."
Prison has sometimes been compared to a third world country due to the lack of capital available to prisoners. John Washburn writes, "A more apt analogy would be a comparison of prison labor to the economies of Germany and Japan after World War II. Each was bankrupt, devastated, had no sizeable natural resources, and was under occupation. Yet over the past decades, both countries have shown what the utilization of 'human capital' can do."
The first prison labor system to be used was the "public account system" in which the state assumed the entire responsibility for its program, including providing for the prisoner's upkeep, providing raw materials for the manufacture of goods, and acting as middle man by selling products. This system, which dates back to the 1700s, provided restitution to the victim and to the state. The "public works and ways system" used prisoners for state projects. It fell out of favor during the 1800s, an era in which the "contract" system of prison labor, which allowed private firms to contract for prisoner labor, was widely used.
Under the contract system, an outside contractor paid the state a specified sum for the labor of a prisoner based on a fixed amount per prisoner. Another system, the "lease" system, was predominant in the southern states following the American Civil War. Under that system, the state would lease the prisoner to a private individual or corporation for a specified sum. In turn, the lessee would agree to house, feed, clothe, and guard the prisoner. It was, in some respects, not much different than prewar chattel slavery.
Another system, the "piece-price system", allowed a contractor to pay a price to the prison authorities for each article the prisoner completed. The prison authorities could then pay a small wage to the prisoner, including incentives for reaching quotas. This system, although used experimentally in Massachusetts, was not as profitable to the state as other systems and did not become widespread. During the 19th century, many state prisons were able to finance their own operations and turn over surplus funds to state treasuries.
In the late 19th and early 20th centuries, organized labor and business successfully lobbied for legislation, such as the Hawes-Cooper Act of 1929, the Ashurst-Sumners Act, and the Prohibitory Act of 1940, prohibiting private firms from contracting for prison labor and selling prison-made goods on the open market. The percentage of the prison population engaged in some sort of productive labor declined from 75 percent in 1885 to 45 percent in 1940. The new regulations led to the "state-use" system, in which prisoners work exclusively for the state and the state is the exclusive market for prison-made goods. The state-use system differed from the public account system in that it was a closed system that did not involve the private sector at all, except as a source of raw materials. In the 20th century, the public works and ways system regained popularity.
One of the arguments for allowing prisoners opportunities to earn higher wage rates through more productive work is that "the savings inmates accumulate in prison may help ease their transition into open society." This could reduce or eliminate the need for lengthy stays in halfway houses. Private participation in prison work programs has taken various forms. In some states, private industry has leased space and operated directly within the prison. Elsewhere prisons have instituted subcontracting arrangements with private industry. Business persons have served as consultants to prisons by investigating the most effective method for improving state industry programs. Private entrepreneurs have also provided financial assistance and have served on the board of directors of one prisoner-run program.
 Prisoner-run businesses
One proposal for making prison labor more efficient is to allow prisoners to run businesses and retain profits. Officially sanctioned inmate-run businesses have included Con'Puter Systems Programming (Massachusetts), the Inmate Novelty Program (Maine), the Law Enforcement Assistance Association's Free Venture Pilot Program, and the Bureau of Justice Assistance's Private Sector/Prison Industry Enhancement Certificate Program.
 Con'Puter Systems Programming
Con'Puter Systems Programming was a data-processing partnership operated by co-director Richard Quillen and eight other graduates of a prison-based computer training program. The partners were both the managers of the business and were responsible for its organization. It was a four-prison operation based in the minimum security coed Massachusetts Correctional Institution in Framingham. Con'Puter was a true entrepreneurship program in that partners had profits at risk and were responsible for borrowed equipment as well as machines donated by Honeywell and Digital Equipment Corporation. They made daily decisions in scheduling, financing, and advertising. The firm earned a net profit of $35,000 on gross revenues of $96,000. According to court documents, Con'Puter generated more than $160,000 in clear profits from 1976 to 1979.
Digital Equipment Corporation spokesperson Chris Desalvo stated that he was pleased with Con'Puter's service and found little difference in dealing with prisoners and with vendors in the outside world. One problem that Con'Puter did encounter was not having a sales force to go outside prison to get business. Con'Puter handled work for state agencies such as the Department of Corrections, the Department of Taxation and Incorporation, the Department of Labor and Industry and the Department of Public Health. The recidivism rate of the prisoners involved was as low as 3 percent, and one of the prisoners, Mike Callahan, became a systems analyst after his release.
On 6 January 1982, Framingham State Prison was raided by 200 state and local police officials and Con'Puter was closed amid charges of five of the partners for tax evasion, including failing to file tax returns, filing fraudulent returns and aiding in the preparation of fraudulent returns. Prosecutors alleged that between July 1979 and June 1980, three of the partners earned an average of more than $24,000 that was not reported for state tax purposes. It was also charged but never proven that Con'Puter served as a front for drug and gambling operations, the former being a major drug network in the Boston and metropolitan Boston area, and the latter being conducted by prisoners receiving betting information via the computer room telephones.
Some of the conversations dealt with logistics of securing drugs and arranging for their delivery to prisoners. Transcripts of telephone conversations also revealed that a great deal of sex was transpiring between the male and female prisoners; subsequently, all of the 34 male prisoners were transferred to maximum security facilities. The 180 female prisoners were allowed to stay. Detective William Shaugnessy remarked, "Although (it) may have been a model prisoner-rehabilitation program at its inception, it has become a model for the operation of an organized criminal empire with the walls of a (prison)."
Quillen, who was transferred from MCI-Framingham to MCI-Norfolk after the raid, opined that the real reason for shutting Con'Puter down was its success: "They wanted to squash our business because we were functioning so well and they had been trying to get their hands on that program for 14 years. I don't know what it is. The Department of Corrections keeps yelling rehabilitation, but it really rubs them the wrong way when they see people in jail doing good and they do everything in their power to stop you from doing it."
 Inmate Novelty Program
The Inmate Novelty Program allowed prisoners to use the prison shop equipment to produce novelties for sale to tourists. Within three years, the gross revenues of the novelty program went from $70,000 to $550,000. Two-thirds of the prisoners participated as employers, employees, or both. Many of the involved prisoners began sending money home to their families.
One entrepreneur turned the prison canteen into a profit making venture. Another had 30-50 employees in novelty production, and purchased and rented 100 television sets to other inmates; upon release, he started a novelty firm that employs former prisoners. Bruce L. Benson writes, "The currency used within the internal labor market was canteen coupons, which could be spent in the prison's canteen or banked in the prison's business office."
Ultimately, a ten-week lockdown was initiated by the State Bureau of Corrections and the entire administrative staff of Maine State Prison was reassigned. Restrictions were imposed on the Inmate Novelty Program amid concerns that a small group on inmates known as the 'novelty kings' had gained too much control over the day-to-day aspects of prison life. In addition, there were concerns about health hazards because the entire prison had been turned into a virtual factory. It appears that the restrictions were reimposed because the Maine Corrections Bureau had received a federal grant under the auspices of the Law Enforcement Assistance Association and, in an effort to obtain the funding, applied the recommendations of a highly negative report funded and conducted by the LEAA.
 Other programs
The goals of the Private Sector/Prison Industry Enhancement Certificate Program were to place inmates in a realistic working environment so that they could acquire marketable skills, make payments of restitution to their victims and support their families, themselves and the institution. This program was piloted in six states. The Free Venture Pilot Program suffered from high labour turnover rates because of inmate transfers. These transfers also greatly reduced the firing authority of supervisors. Payments to prisoners under that program ranged from $.20 to $3.74 an hour, with the majority of Free Venture shops paying less than $.50 an hour. The Stillwater Data Processing Systems program allowed prisoners to occupy temporary project manager positions and to sit on the company's board of directors. Other than that, the PS/PIECP lacked any substantial input or management on the part of the prisoners and was little more than a better-paying contract or piece-price system.
Zephyr Products is another example of a prisoner-staffed business.
One of the arguments against prisoners receiving income is that it interferes with their punishment. Still, it seems likely that a prisoner, if given the choice, would prefer to walk out of the door than to remain in prison, even if he were receiving an income there. Thus, he is still being punished.
Another argument is that prisoners should not be allowed to organize, lest they cause trouble. However, "enforced idleness" has also been cited as a possible factor encouraging the formation of violent gangs in prison. It is noteworthy that although some prisoner-entrepreneurs may have engaged in criminal activity, the crimes, such as drugs, gambling and tax evasion, were nonviolent and in many cases victimless. A solution to the tax evasion problem might be to impose harder-to-evade taxes such as the rental fee on space leased out for prison businesses. It is possible to understate revenues or to overstate expenses, but the rental fee amount, being contractually established, would not be subject to such manipulation.
Likewise, some concern has been expressed over the kinds of implements, such as knives, that prisoner laborers might have access to. But prisoners already use such implements in other types of work and can obtain "shanks" through the underground economy anyway. A prison that provides lucrative work opportunities gives prisoners more to lose if they misbehave, so it could deter bad behavior.
- Hazlitt, Henry. "The Fetish of Full Employment". Economics in One Lesson.
- Washburn, J.J. (Winter 1987). "Businesses Behind Bars: The Case for Prisoner Entrepreneurship". New England Journal on Criminal and Civil Confinement 13 (1): 117-144. https://www.ncjrs.gov/App/publications/Abstract.aspx?id=106941.
- Benson, Bruce L. (1998). "Encouraging Effective Privatization in Criminal Justice, Part II". To Serve and Protect. pp. 300.
- Garvey, Stephen P. (January 1998). "Freeing Prisoners' Labor". Stanford Law Review 50 (2): 339-398. http://www.jstor.org/stable/1229292.
- Associated Press (20 February 1982). "Radical and Four Others Indicted in Tax Fraud".
- AP (13 February 1982). "'Paradise' Lost: Male, Female Inmates Indulged in Sex, Drugs, Gambling". The Palm Beach Post.
- Paul, Lois (15 March 1982). "Con Claims Success Felled Prison DP Bureau". Computerworld.
- Benson, Bruce L.. "Encouraging Effective Privatization in Criminal Justice, Part II". To Serve and Protect.
- "Reducing Re-offending: The Enterprise Option". Small Business Service. January 2004. http://www.bis.gov.uk/files/file38350.pdf.
- Callison, H.G. (1989). Zephyr Products: The Story of an Inmate-staffed Business. ISBN 0-929310-17-9. https://www.ncjrs.gov/App/publications/Abstract.aspx?id=117939.