Immigrant-non-immigrant wage gap revisited: Evidence from the PIAAC survey

This paper uses a cross-section of 21 countries from the Programme for the International Assessment of Adult Competencies (PIAAC) to re-examine the immigrant-non-immigrant earnings gap. We exploit the availability of cognitive skills measures in the data, such as numeracy and literacy scores, allowing us to minimize the presence of unobserved effects such as ability bias, and ultimately – to have more credible results. To this end, we employ a modified Mincer earnings function and Oaxaca-Blinder mean log-wage decomposition (Oaxaca (1973) and Blinder (1973)). We also make use of the decomposition technique by DiNardo, Fortin and Lemieux (1996) to examine the earnings gap across the entire earnings distribution.

We find that immigrants have lower returns to education than native workers, yet higher returns to literacy proficiency. This conforms to the statistical discrimination literature suggesting that employers may view educational attainment as a less reliable productivity signal for immigrants, and that in the absence of other reliable productivity signals, they place higher weight on immigrants’ language proficiency. Further, the Oaxaca-Blinder decomposition results imply that a log-wage model specified without cognitive skill measures would overestimate the unexplained part of the mean immigrant-non-immigrant gap by nearly double, while including numeracy and literacy test scores reveals a lower role for discrimination, just below 7 percent. Lastly, the DiNardo-Fortin-Lemieux decomposition suggests that numeracy and literacy test scores matter almost equally throughout the entire log-wage distribution but cannot fully explain the observed immigrant-native gap, except for the bottom and the top decile. Much like the Oaxaca-Blinder results, the DiNardo, Fortin and Lemieux results imply presence of labour market discrimination against non-native workers, but suggest the magnitude of this discrimination is lower than that implied without controls for numeracy and literacy proficiency.