On the wage growth of immigrants: Israel, 1990-2000

This paper develops a descriptive methodology for the analysis of wage growth of immigrants that is based on human capital theory. The sources of the wage growth are (1) the rise of the return to imported human capital, (2) the impact of accumulated experience in the host country, and (3) the mobility up the occupational ladder in the host country. The model implies a nonlinear wage function that includes interactions between imported skills and local wage growth. Using data on native Israelis and immigrants from the former Soviet Union of Israel, we estimate wage equations jointly for the two groups. We find that, upon arrival, immigrants receive no return for imported skills. In the ten years following arrival, wages of highly skilled immigrants grow at 8 percent a year. Rising prices of skills, occupational transitions, accumulated experience in Israel, and an economy-wide rise in wages account for 3.4, 1.1, 1.5, and 1.5 percent each. In the long run, the return for schooling converges to 0.027, substantially below the 0.069 return for natives. We do not reject the hypothesis that the return for experience converges to that of natives and that immigrants receive a higher return for their unmeasured skills. We find that there is some downgrading in the occupational distribution of immigrants relative to that of natives. Moreover, the average wages of immigrants approach but do not converge to the wages of comparable natives. The main reason for this is the low return to their imported skills.