In the formal labor market the arrival of refugees acts as a demand shock. Whether that demand shock is positive or negative depends on two factors. First, formal and informal labor is to some degree substitutable, as the cost of informal labor falls employers will – for a fixed level of output – substitute from formal to informal labor. This will decrease the demand for formal labor. Second, the reduction in the cost of informal labor will decrease the costs of production allowing firms to expand output. This increases the demand for all types of labor, including formal labor. The net impact on the demand for formal labor is theoretically ambiguous; it is an empirical question whether it is positive or negative.<sup>32</sup> In addition to the labor supply shock, refugees also consume goods and services resulting in an increase in demand. This increase in demand will be particularly large in regions where camps have been built. The construction and management of these camps, which by all accounts are some of the best-equipped refugee camps anywhere, channels considerably resource to the affected areas (and are primarily paid for by the central government). Moreover, there is substantial investment of Syrian capital in the creation of new firms in Turkey (World Bank, 2015). Akgunduz, van den Berg and Hassink (2015b) estimate that around 40 percent of the newly established firms are being opened with backing of foreign capital. This will of course increase the demand for all types of labor.

Our empirical results are entirely consistent with this simple framework for understanding the labor market impact of the inflow of Syrian refugees. First, as predicted, the refugee shock causes large-scale displacement of Turkish out of informal employment. This is true for all categories of workers: male, female, young and older, and by educational attainment.

Second, the impact on formal employment is more mixed. On average the impact of the inflow of refugees on the formal employment of natives is positive. An increase in the supply of informal labor increases the demand for formal jobs for Turkish workers.<sup>33</sup> However, that is not true for all types of Turkish workers. There is no increase in formal employment for either women or high-skilled natives due to the inflow of refugees. The economic interpretation is that there is less complementarity between the types of formal jobs women

> 32 See Ozden and Wagner (2015) for an extensive discussion of these two effects, and an empirical strategy for identifying their magnitude. In general, the magnitude of the substitution effect depends on how easily employers can substitute formal and informal labor. The magnitude of the output expansion effect (called the scale effect) depends on the elasticity of product demand and the elasticity of supply of capital. The greater both elasticities are, the more output expands as a result of the cost reduction caused by the refugee inflow.

> 33 Akgunduz, van den Berg and Hassink (2015b) find that firm entry increased in provinces hosting refugees (and there is no concurrent increase in firm exits), which helps explain the increased demand for formal labor.

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