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Earnings in the Lost Years

 

Earnings of Immigrants to Canada



Economists have documented immigrants’ economic integration in the North American labour force in some detail. Upon entry into Canada, regardless of their skill level, foreign-born workers initially experience lower earnings than their Canadian-born cohorts. Over the next ten to fifteen years, the foreign-born worker typically earns less than his or her Canadian-born counterparts but on average, the earnings difference becomes progressively smaller as the foreign-born worker learns English, acquires more formal education, accumulates on-the-job training, and moves to more skilled occupations. Without these so-called “investments in human capital”, the typical foreign-born worker’s earnings will never catch up to the earnings of the Canadian-born worker.


Given that this human capital investment process occurs, the earnings progression a typical foreign-born worker will usually experience relative to this or her Canadian-born cohort would occur in three phases:


1. Below-normal earnings: the region in which foreign-born earnings are below Canadian-born earnings appears at entry and lasts for some ten to fifteen years.
2. “Catch up” to a “cross-over” point: the movement in earnings by the foreign-born from below the Canadian-born average to the cross-over point depends critically upon human capital acquisition (e.g., training, formal schooling, language skills) by the foreign-born worker; and,
3. Above-normal earnings: as foreign-born workers gain job experience, increase their English language fluency and obtain more formal training, due to the fact that their human capital is more recent than that of their Canadian-born counterparts, foreign-born workers’ earnings often surpass the earnings of Canadian-born workers with comparable labour force characteristics.

Given this well-documented empirical finding regarding earnings assimilation in Canada it is clear that using samples of both foreign-born and Canadian-born workers to estimate the earnings of the foreign-born would be incorrect. In short, the earnings of foreign-born and Canadian-born workers are distinct phenomena, regardless of skill level.


The speed of earnings assimilation will differ dramatically if the foreign-born worker is unskilled, accumulates little human capital, or fails to attain fluency in the English language. In this situation, the earnings of the foreign-born will grow slowly.


The key to estimating a foreign-born Canadian’s expected lifetime earnings is to estimate a lifetime earnings profile from Census panel data to determine the influence of relevant variables on earnings. This so-called “earnings function” in turn provides the information required to simulate an age-earnings profile for a cohort which contains all of the specific individual’s relevant labour force characteristics. The latter step is essential: how well a particular foreign-born individual will do in terms of earnings relative to his or her Canadian counterparts and relative to other foreign-born workers depends upon the actual (or assumed) labour force characteristics of the individual. These characteristics include the following (among others): sex, occupation (skill level), current place of residence, marital status, years of schooling, knowledge of conversational English, and language spoken at home.