The Immigrant-Native Wage Gap in Germany

Abstract

Summary Immigrant-native wage differentials are observed in many countries, so in Germany. However, the available empirical literature for Germany defined the groups in consideration, immigrants and natives, by citizenship. This limits the explanatory power of the estimates since citizenship distinguishes foreigners and German nationals, but assigns naturalised immigrants (including the large group of ethnic Germans) to the latter group. Providing a more adequate definition based on the concept of origin we analyse the immigrant-native wage gap. Based on data from the German Socio-Economic Panel Study,we decompose the wage gap between native Germans, foreigners, and naturalised immigrants, and consider further subgroups in the analysis. In the literature, time of residence has been proven to be a relevant determinant of immigrants’ wages. For the natives, time of residence is perfectly collinear with age, and unequal sets of variables have to be considered.We therefore suggest an extension of the Oaxaca-Blinder decomposition technique. Our results show a substantial gap in earnings for all immigrants’ groups compared to natives. Discarding immigrants who completed education abroad reduces much of the immigrants’ wage gap. Hence, educational attainment in Germany is an important component of economic integration of immigrants, and degrees obtained abroad are valued less.