Chapter 7 Understanding the Wage Dynamics of Immigrant Labor: A Contractual Alternative

Empirical evidence on the labor market performance of immigrants shows that migrant workers suffer from an initial disadvantage compared to observationally equivalent native workers, but that their wages subsequently tend to increase faster than native earnings. Economists usually explain these phenomena by spot markets for labor and investments into human capital. By contrast, this chapter proposes a contractual model. This alternative has important implications for integration policy, because it suggests investing into the transparency of foreign educational credentials. Also contrasting human capital theory, the model suggests that permanent migrants never earn higher wages than equally skilled temporary migrants.