Avoiding Prejudice: Islamophobia and the Labor Supply of Arabs and Muslims in the U.S.

This paper provides direct evidence that members of a disfavored group adjust their economic behavior in response to prejudice. We exploit plausibly exogenous, localized increases in anti-Arab and anti-Muslim sentiment generated by combat fatalities of U.S. service members from a given state during the wars in Iraq and Afghanistan between 2001 and 2014. Linking detailed records on military fatalities with survey data, we estimate the causal effect of these shocks on the labor supply of Arab and Muslim men residing in the affected states. Following a home-state fatality, Arab and Muslim men reduce their weekly hours of work by approximately one percent relative to the baseline sample mean. The reduction is twice as large among the self-employed and concentrated in occupations requiring frequent customer or co-worker interaction. These patterns are consistent with avoidance-based sorting predicted by prejudice-based models of discrimination. The timing of the response coincides with short-lived increases in anti-Muslim hate crimes, confirming that the estimated effects reflect shifts in prejudice rather than broader economic conditions. Our findings provide direct evidence that prejudice can distort market outcomes by inducing targeted individuals to withdraw from interactions with prejudiced market participants.