Discussion paper

DP763 The Earnings Dynamics of Immigrant Labour

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.


Schmidt, C (1993), ‘DP763 The Earnings Dynamics of Immigrant Labour‘, CEPR Discussion Paper No. 763. CEPR Press, Paris & London. https://cepr.org/publications/dp763