Essays on Labor and Public Economics

Wang, Lichen, Economics - Graduate School of Arts and Sciences, University of Virginia
Turner, Sarah, AS-Economics (ECON), University of Virginia
Friedberg, Leora, AS-Economics (ECON), University of Virginia
Lockwood, Lee, AS-Economics (ECON), University of Virginia

Governments are increasingly responsible for resource allocation and policy implementation to improve the affordability of essential living expenses. However, the presence of market frictions, such as limited outside opportunities, imperfect mobility, and information asymmetry, can sometimes lead to unintended consequences of these policies. As a result, additional discretion may be needed to restore the desired outcomes.

The first chapter of the dissertation examines the impacts of government procurement drawdowns on the local labor markets. Specifically, it focuses on the period following the landmark Nuclear Treaty between the U.S. and the Soviet Union. Due to changing diplomatic circumstances, the U.S. Department of Defense (DoD) decreased its procurement budget by approximately 44% over a decade. The exposure to procurement drawdowns exhibits substantial variation across different locations and sectors within a given area. To analyze the local impacts of these drawdowns, I employ an instrumental variable (IV) approach to isolate the plausibly exogenous part of the procurement shocks across locations. The findings reveal that defense drawdowns significantly affected the flagship defense-related sectors. Evidence also suggests that the other manufacturing sectors were unable to entirely absorb the displaced workforce. Additionally, estimates show a net adverse spillover effect on the local non-tradable industry. However, results find limited impacts on civilian wages and the number of establishments. Further explorations into labor supply responses reveal a swift reaction characterized by reduced in-migration, although with no evidence of increased out-migration. These findings lean towards advocating for targeted approaches, such as specialized job training, rather than pursuing a broad place-based policy.

The second chapter investigates how a national experiment aimed at alleviating individuals’ financial burdens could end with unintended consequences. Many countries struggle with high medical expenses due to high prescription medicine prices. This chapter, in collaboration with Jiafeng Wu (University of Virginia), leverages a Chinese national experiment that implemented a zero-markup policy (ZMP) on medication sales in public hospitals to provide new evidence regarding its effectiveness in reducing patients’ financial burdens. By employing a conditional difference-in-differences strategy, I examine average spending and service usage changes resulting from this plausibly exogenous government initiative, aiming to understand how physicians modify their behaviors in response. The findings reveal that the average patient’s medication expenditure significantly decreased following the policy implementation. However, this reduction was accompanied by increased service spending, resulting in a marginal decline in the overall medical bill. Furthermore, hospitals may have employed various methods to compensate for the loss of drug revenue. Physicians may have leveraged their informational advantage to prescribe costlier treatment materials, which could have been obscured within the final medical bills. The results also indicate suggestive transfers of financial burdens between diagnosis groups.

The third chapter studies the local economic impacts of a positive demand shock from a particular immigrant group. Over the past two decades, the number of international students attending colleges and universities in the United States has nearly doubled, increasing from 0.54 million in 2000 to a peak of 1.09 million in 2017. In this chapter, I examine the expenditure impacts resulting from the significant influx of international students pursuing higher education in the United States between 2000 and 2019. Focusing on college towns --- the cities with a significant presence of college students --- the analysis exploits the variation in international student enrollment. To estimate the causal effects on a selected non-traded industry, I employ an IV approach to account for potential confounding factors. The findings support and quantify the existence of a demand effect resulting from the presence of international students. For instance, an increase of 1,000 international college students in a city with a 100,000 baseline population brings about 9 - 13 more food and drinking places. The positive effects, however, are concentrated only in small-sized establishments, leading to relatively limited employment growth. This paper adds to the impact analysis of international students through the lens of local product markets.

PHD (Doctor of Philosophy)
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