The Composition of Wage Differentials between Migrants and Natives

TL;DR

This paper uses an empirical general equilibrium search model to decompose and analyze the wage gap between migrants and natives, focusing on unobservable factors like search frictions and productivity differences.

Contribution

It introduces a novel decomposition method for migrant-native wage differentials using a detailed search model and large-scale German data, clarifying the drivers of wage gaps.

Findings

Identifies the 'migrant effect' as a key component of wage differences.

Quantifies the impact of unobservables like search frictions and productivity.

Provides counterfactual scenarios to explain the unexplained wage gap.

Abstract

We consider the role of unobservables, such as differences in search frictions, reservation wages, and productivities for the explanation of wage differentials between migrants and natives. We disentangle these by estimating an empirical general equilibrium search model with on-the-job search due to Bontemps, Robin, and van den Berg (1999) on segments of the labour market defined by occupation, age, and nationality using a large scale German administrative dataset. The native-migrant wage differential is then decomposed into several parts, and we focus especially on the component that we label "migrant effect", being the difference in wage offers between natives and migrants in the same occupation-age segment in firms of the same productivity. Counterfactual decompositions of wage differentials allow us to identify and quantify their drivers, thus explaining within a common framework what is often labelled the unexplained wage gap.