What drives the widening of the immigrant wage gap?

A row of origami dress shirts made from dollar bills - one of the shirts is out of focus in the background.

In the United States, the wage gap between natives and recently arrived immigrants has widened over the last few decades. This has been interpreted as evidence of a decline in the quality of the skills of incoming migrants. In BSE Working Paper No. 1280, “Labor Market Competition and the Assimilation of Immigrants,” Christoph Albert, Albrecht Glitz and Joan Llull seek to shed new light on this fact and provide an alternative mechanism that explains, at least partially, the increase in the immigrant-native wage gap.

Competing for the same jobs?

The main idea behind the new mechanism is the following. Natives and recently arrived immigrants tend to have different sets of skills, which makes them compete for different jobs (in Economics jargon, they are imperfect substitutes in the labor market). Broadly speaking, one can think of workers having two main types of skills: general skills that are perfectly portable across countries (e.g. manual skills and math) and specific skills that are particular to each country (e.g. language proficiency and knowledge of the local business culture). Immigrants are thought to have similar general skills as comparably educated native workers but only a fraction of their specific skills. As immigrants spend more time in a country, however, they keep accumulating more specific skills, which makes them less and less distinguishable from native workers as time goes by, inducing wage convergence.

Figure 1 shows that this can be observed for immigrants who arrived in the United States during the 1960s. However, we see that this convergence is no longer happening for younger cohorts: these younger cohorts start off with a significantly larger wage disadvantage upon arrival, and their wages converge at a slower rate. What can be the cause of this pattern?

Figure 1. Evolution of the difference of immigrants’ wages to those of natives

Note: Solid lines represent fitted values of a regression that includes cohort and year dummies, a third order polynomial in age interacted with year dummies, and a (up to a) third order polynomial in years since migration interacted with cohort dummies (in particular, we include the first term of the polynomial for all cohorts, the second term for all cohorts that arrived before 2000, and the third order term for all cohorts that arrived before 1990). Cohorts are grouped in the following way: before 1960, 1960-1969, 1970-1979, 1980-1989, 1990-1999, and after 2000. Colors represent cohorts. Dashed lines represent model predictions for the same outcomes.

The answer to this question is closely linked to the observation that immigrant inflows into the United States have been steadily increasing over time. Supplying a similar amount of general skills but a lower amount of specific skills than comparable natives, the arrival of new immigrant workers increases the relative supply of general skills in the economy.  Following a standard supply-demand logic, when many immigrants enter the country, the larger availability of general skills leads to a decline in the relative price of these skills through labor market competition. Since general skills are a more important component of immigrants’ skill bundles than of natives’ skill bundles, this shift in equilibrium skill prices has a more detrimental impact on immigrant wages than native wages, widening the immigrant-native wage gap. 

Applying this logic to a dynamic setting, immigrants’ wage assimilation profiles therefore depend not only on their own skills and their accumulation over time, but also on the number of immigrants who arrived in the host country at the same time and the size of future cohorts of immigrants. The more time immigrants have spent in the host country, the more similar they are to native workers in terms of the skills they supply and the less affected they are by new immigrant inflows. This suggests that the competition effect is particularly strong in the early years after arrival.

Is it only the skills, then?

In the light of the proposed labor market competition channel, the authors scrutinize the common perception that changes in the immigrant-native wage gap are driven by a decrease in the level of skills of new cohorts of immigrants.

The authors’ findings, summarized here in Figure 2, suggest that this is not the complete story. In particular, as shown in the figure, between a quarter and a third of the increase in the initial wage gap across cohorts can be explained by increasing labor market competition. Moreover, the figure also shows that the remaining decrease is explained by compositional changes in terms of immigrants’ national origin and education.

Once these two channels are accounted for, the authors find that more recent immigrants (from a given country of origin and with a given education level) actually arrived with more specific skills than previous ones. In other words, recent immigrants from a given origin and education are better prepared than earlier immigrants, which could be the consequence of increasing globalization over the time period considered (which, for example, increased the exposure of prospective migrants to English language).

Figure 2. Competition Effects, Inflow Composition, and Observed Wage Gaps

Note: The figure shows baseline and counterfactual predictions of the unconditional wage gaps between natives and immigrants for different cohorts as they spend time in the United States. Each plot represents one cohort. The depicted lines are predicted assimilation profiles obtained from regressions analogous to those underlying Figure 1, estimated on predicted wages under the different counterfactual scenarios. The baseline profiles (solid) correspond to the model predictions (dashed lines) in Figure 1 of this post. The counterfactuals represent assimilation profiles in the absence of competition effects (short-dashed line), holding additionally immigrants’ region-of-origin composition constant at the level of the 1960s cohort (dotted line), and setting additionally the educational attainment of immigrants equal to that of natives born in the same year (long-dashed line). The last two counterfactuals are obtained by re-weighting immigrant observations to match the corresponding region-of-origin and educational distributions.

What could this imply for immigration policy?   

Besides documenting the important role of labor market equilibrium effects and aggregate supply in determining the wage assimilation of immigrants, the findings of this paper imply that the skill accumulation process of immigrants directly shapes their wage impact in the labor market. As immigrants become more similar to native workers, the latter face increasing effective labor market competition that puts downward pressure on their wages. As cohorts of immigrant workers accumulate more specific skills, they will have different impact on native workers over time.

Moreover, the findings of this paper are very relevant for the optimal allocation of immigrants across space (e.g. in the context of refugee dispersal policies) as a higher concentration may also affect the prospects of labor market assimilation.

Finally, the results of this study suggest that policy measures seeking to control the size of local immigrant inflows and composition might have unintended consequences for the wage assimilation process of the pre-existing immigrant populations.