Immigration, Search and Loss of Skill

This paper analyzes the process of entry of highly skilled immigrants into the Israeli labor market, using panel data on several cohorts of recent immigrants from the former USSR. The study develops and estimates an on-the-job search model, cast as a finite horizon, discrete choice dynamic programming problem under uncertainty, that is capable of capturing the main features of this process: a speedy entry into the labor force, an initial phase of work at low skill occupations, a gradual occupational upgrading and a sharp increase in wages. The estimated parameters of the model, together with information on the wages of immigrants from earlier waves, allow the simulation of an occupational path and associated wages, for each new immigrant, from the time of arrival until retirement. The predicted lifetime earnings at the time of arrival are compared to the hypothetical lifetime earnings immigrants would have obtained had their imported observable skills been valued in the same way as comparable Israelis. The results of the study suggest that, on average, immigrants can expect lifetime earnings to fall short of the lifetime earnings of comparable Israelis by 57 percent. Of this figure, 14 percentage points reflect frictions associated with nonemployment and job distribution mismatch, and 43 percentage points reflect the gradual adaptation of imported schooling and experience to the local labor market