How different are wages from wage potentials? Analyzing the earnings disadvantage of immigrants in Germany

Immigrants in Germany display a poor earnings performance relative to natives. Arguing that human capital endowments identify earnings potentials rather than actual earnings, this paper estimates a stochastic earnings frontier and searches for systematic differences between natives and migrants in terms of distance to the frontier. GSOEP-Data of the year 2000 is used for estimation. The empirical results clearly support the frontier assumption, but - surprisingly - find natives and immigrants at about the same distance to the frontier. Assuming a halfnormal distribution of the wage-inefficiency term, both groups transformed on average a modest 81% share of their potential income into market earnings. Due to the similar positions of natives and immigrants relative to the frontier, the wage discrimination hypothesis is rejected. Actually, human capital differentials are clearly the most important source for wage inequality. The earnings frontiers of immigrants from Eastern Europe as well as from Turkey are steeper than the respective frontier of natives, which supports the assimilation hypothesis. No assimilation is found for migrants from the European Union and from the former Yugoslavia.