Abstract

The aim of this project  is to augment the existing literature, both theoretically and empirically, with respect to the following aspects. First, our objective is to account for different channels shaping the assimilation process. In particular, we focus on the importance of social externalities (measured by average ethnic human capital at local residential area) and its behavioral implications on human capital investment.
Second, we deviate from the standard wealth-maximization principle, assuming implicitly risk-neutral preferences. More specifically, we seek to model the importance of intertemporal consumption preferences on human capital accumulation decisions. Moreover, we examine how the role of social externalities varies under different preferences.
Our main objective is, therefore, to address the following questions: How does social interaction, such as ethnic quality, influence immigrants’ labor market performance, both at entry and subsequent years? Do differences in intertemporal preferences play a role in the investment behavior and, in turn, the assimilation process?
The theoretical predictions reveal that the impact of social externalities on immigrants’ economic performance is substantially affected by their preferences. The idea is that intertemporal preferences implicitly reflect individual risk attitudes, which may in turn affect importantly the decision behavior. To our knowledge there is no study that examines this aspect in the context of wage convergence.
In addition, we will provide empirical evidence by using the new IAB-SOEP migration sample to estimate the investment behavior regarding language proficiency as well as general human capital acquisition in the host country. Moreover, linking the survey data to administrative data – Integrated Employment Biography (IEB) – allow us to observe the entire individual labor market history and thus to exploit the longitudinal dimension for testing the wage assimilation process.
A preliminary inspection of the data shows that the average wage gap between immigrants and natives since arrival in Germany has declined by about 10 percentage points over the period 1998-2011, and that this decline was much stronger for immigrants with risk preferences close to neutrality.