How Immigrants and Students Respond to Public Policies: Evidence from Welfare Reform, the Minimum Wage and Stafford Loans.

Abstract

The first two essays of this dissertation use policy experiments to show that low-skilled newly arriving immigrants help keep the economy in geographic equilibrium by differentially selecting destinations that provide better labor market prospects. The first essay finds that immigrants choose labor markets with smaller welfare-reform created native supply shocks. Theory predicts that an increase in native supply will lower the earnings a new immigrant can expect, and immigrants thus should choose labor markets experiencing smaller supply shocks. Using a linearized version of a discrete choice model, I find that the distribution of immigrants' destinations shifts markedly away from cities with high welfare participation prior to reform toward cities with lower participation. This shift "undoes" nearly all of the difference in labor supply that would have resulted had immigrants not altered their destination choices.

The second essay shows that immigrants also respond optimally to the minimum wage. These policy changes have a theoretically ambiguous effect on a job seeker's expected earnings; so I first use native teenagers to determine that a minimum wage increase will lower expected earnings for a new entrant. I then show that immigrants differentially select destination states with smaller increases or a fixed minimum, consistent with the theory. The results are strong and statistically significant even after accounting for several potentially confounding alternatives. As a falsification test, I show that the minimum wage does not affect the destinations chosen by higher-skilled immigrants.

The final essay, written with Ben Keys, proposes an explanation for a surprising borrowing phenomenon: nearly one fifth of undergraduate students who are offered interest-free loans turn them down, foregoing a significant government subsidy worth up to $1,500. We discuss how advances behavioral economics can explain students' failure to accept this "free money." We then demonstrate a differential rejection rate based on how students receive their loan funds. Using a difference-in-differences strategy, we find that students who would receive their loan as easy to spend cash are seven percentage points more likely to reject the loan than are similar students living off-campus. We interpret this finding as evidence for the behavioral explanation.