Third World poverty and the collapse of the East European economies are soon expected to induce large-scale migration. Economists commonly measure assimilation by comparing migrants' earnings growth with natives'; existing evidence indicates that after an initial disadvantage their earnings rise faster, but contractual models of the labour market demonstrate that rising age-earnings profiles need not reflect productivity growth. In Discussion Paper No. 763, Research Affiliate Christoph Schmidt tests such a contract-theoretic model on German data. Migrant workers' true abilities are unknown, but sequential observations on their output provide increasing information. In equilibrium, competitive firms bid up wages of workers who generate high output while others' remain constant; risk-averse migrants accept the initial disadvantage to insure against detection of low ability; migrant cohorts' average earnings thus rise over time. This mechanism is complementary to productivity increases, but its relative importance is difficult to assess.

In traditional models, incentives to invest in human capital increase with workers' planning horizons, so permanent migrants' earnings profiles cross those of their temporary counterparts from below, but this does not apply to contract models. Schmidt establishes the pattern of migrants' wage convergence with natives and the relationship of their return propensities to observable characteristics in order to infer their return propensities on entry, which he then relates to earnings growth. An average migrant takes about 17 years to achieve parity, but low return propensities on entry imply steeper earnings profiles, which weakly supports the contract model. Low initial earnings of new permanent migrants into Western Europe may therefore not signal a high propensity to invest in human capital accumulation but rather their low abilities or at best greater information disparities with natives (which are also undesirable). Migrants of high abilities prefer to reveal them while those of lower abilities are pleased to avoid detection initially, but natives who signal their own low abilities on entry to the labour market view their lower earnings as socially unjust. Schmidt suggests that governments try to alleviate uncertainties about incoming migrants' abilities through screening.

The Earnings Dynamics of Immigrant Labour
Christoph M Schmidt

Discussion Paper No. 763, January 1993 (HR)