Returns to global human capital: Evidence from the US labor market

In this paper, we test whether individuals with international experience earn a premium in the United States labor market.  A number of approaches are used to attempt to answer this question, most notably by comparing the earnings of return migrants to those who have never left their home countries (e.g. Barrett and Goggin, 2010).  Voluntary migrants, however, are likely self-select to migrate.  Comparisons of return migrants and non-migrants do not cleanly capture the effect of international experience, capturing also migrants’ unobservable characteristics (e.g. initiative, risk-taking).  In order to disentangle the returns to international experience from these unobservable characteristics, Pozo (2014) compares the adult earnings of children born abroad to American parents (INTs) to children born on US soil.  INTs do not choose to gain international experience but are born into it.  They are similar to Americans born on US soil in important respects (raised in the U.S. ethos) but they are exposed to other cultures, languages, and customs that children born inside the United States are less likely to experience.  Pozo (2014) argues that by comparing the adult earnings of INTs to those born on US soil, one can make a valid assessment of the returns to international experience. 

This paper argues, however, that while INTs do not choose to gain international experience, their parents may have chosen to emigrate and would be self-selected.  Since home environment is an important factor in determining future success and parents who emigrate are not randomly selected, we argue that it is important to control for parental environment.  Using data from US Censuses and 4.25 million individuals (2.42 million men and 1.83 million women) in the American Community Survey, we construct a two-step estimation procedure to control for parental heterogeneity and show that INTs continue to earn a small premium in the US labor market over similar adults born on US soil.  We also show that individuals with this type of international experience in management and professional occupations earn more than similar workers who are born inside the United States.  This effect appears to be stronger for women than for men.  We compare the results with multiple model specifications.

In an era when businesses are increasingly global while populist movements questioning the benefits of globalization, the ability to reliably measure and understand returns to international experience is particularly pertinent.