Working Paper: CEPR ID: DP763
Authors: Christoph M. Schmidt
Abstract: Empirical evidence on the labour market performance of immigrants shows that migrant workers suffer from an initial earnings disadvantage compared to observationally equivalent native workers, but that their subsequent earnings tend to increase faster than native earnings. Economists usually try to explain this phenomenon by spot markets for labour and increases in human capital. In contrast, this paper proposes a contract theoretic model as an alternative to productivity related arguments. It is argued here that the possible distinction of migrants according to their return propensities provides a natural experiment for tests for the underlying process. A test with German data weakly supports the contract model. The ideas presented here have important implications for the emerging group of new immigration countries, most prominently for those in Western Europe.
Keywords: migration; earnings dynamics; human capital; implicit contracts
JEL Codes: D83; J31; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Risk aversion among migrants (F22) | Initial earnings disadvantage of migrants (J69) |
| Migrant workers achieve earnings parity with natives after 17 years (J61) | Long-term upward trajectory in earnings (J31) |
| Initial earnings disadvantages (J31) | Underlying contractual dynamics in labor market (J41) |
| Low initial earnings (J31) | Future value addition to labor force (J49) |
| Initial earnings disadvantage of migrants (J69) | Subsequent earnings growth of migrants (J61) |
| Increased information about worker productivity (J29) | Wage adjustments for migrants (F16) |
| Migrant workers' abilities revealed through labor output (J82) | Faster earnings growth compared to natives (J69) |