The Effect of Language Proficiency on Immigrants' Labour Earnings

University essay from Handelshögskolan i Stockholm/Institutionen för nationalekonomi

Abstract: This study examines the returns to language proficiency for immigrants in Germany. It uses self-reported language proficiency as a proxy for the objective skill level. Estimating the effect is complex and it is likely to be biased due to several factors, such as unobserved heterogeneity, measurement errors, and reverse causality. We therefore employ instrumental variable (IV) strategies to attempt to mitigate these issues, using father's education, and leads and lags of self-reported language proficiency. The findings suggest large returns to language proficiency; 14.5% for OLS, 21.4-26.5% for different combinations of leading and lagging variables as instruments, and 59.5% using father's education as an instrument. We find no difference in returns between genders. Furthermore, there is a higher return for refugees compared to economic migrants, and a higher return for high-skill workers compared to low-skill workers. Much of the effect on earnings from improved language proficiency seems to be through the possibility of receiving a higher-paying job, rather than through improving productivity within a specific occupational position. This in turn suggests that language proficiency is an important complementary to other forms of human capital.

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