The Immigrant-Native Wage Gap in the United States

Abstract

Immigrants to the United States earn lower wages than native workers, and this gap decreases with time spent working in the US labor market. In this paper, we study the determinants of the wage path of immigrants in order to understand this wage gap between natives and immigrants. We focus on two particular explanations: differing returns to experience in the US and search frictions when finding optimal occupations. Labor market experience in the US may be more valuable for jobs in the US than labor market experience in other countries. In addition, it can take time for new immigrants to be matched with their optimal occupation after moving to the US. Separating these factors is difficult due to potential self-selection of immigrants. To deal with this, we use data from the New Immigrant Survey which has detailed information on the occupations and wages of immigrants both before they enter the US as well as repeated observations after moving to the US. Reduced form evidence shows that both search frictions and work experience affect immigrant wages. We develop and estimate a simple model of on-the-job human capital accumulation and job search. Using the estimated model, we simulate counterfactuals to understand the importance of each factor. In the first simulation, we find that immigrant wages over a lifetime increase by 32% when returns to experience in the home country are the same as returns to experience in the US. In the second simulation, we match immigrants with their optimal occupation in their first US job, and find that this increases wages by 5%.