To work or not? Wages or subsidies?: Copula-based evidence of subsidized refugees’ negative selection into employment

Despite increasing interest in topics related to refugees, economic literature has remained mostly silent on how refugees make labor supply decisions in their initial resettlement period, during which their host government provides various care and financial assistance. This paper fills that void by applying the copula-based selection model, which is free from the restrictive joint normality assumption, to a unique, high-dimensional data set of refugees who resettled in the US. Its selection parameter estimates suggest that subsidized refugees negatively select themselves into employment in terms of unobserved wage potential, which, according to the theoretical model, should be attributed primarily to the fact that (i) their reservation wages are rigid due to host-provided, non-labor income and (ii) host country employers discount refugees’ unobserved human capital components substantially. As a result, employed refugees’ wages, all observable factors held constant, are lower than the counterfactual wages of non-employed refugees, which contradicts what is usual in conventional labor markets. This devaluation-based skill paradox is more pronounced in regions unfriendly to refugees, and the negative pattern temporarily reversed immediately after the 9/11 attacks, which represented a huge adverse shock to non-natives in the US labor market, suggesting that subsidized refugees’ labor supply decisions are influenced greatly by their expectations regarding future labor market outcomes. Possible explanations are discussed based on a simple theoretical model in the context of the US refugee resettlement system.