The Role of Cognitive Skills and Their Use at Work in Explaining the Immigrant-Native Wage Gap

This paper analyses the immigrant-native wage gap and incorporates cognitive skills to approximate an individual human capital profile. Based on data from the Programme for the International Assessment of Adult Competencies (PIAAC) for 15 European countries, we document that on average foreign-born respondents achieve substantially worse scores in literacy and numeracy test domain, and the observed gap in cognitive skill declines over the period of the host-country stay. The results of the analysis show that once we account additionally skill use at work in wage regressions, along with actual skill level, no statistically significant gap in earnings across immigrants and natives remains. These findings indicate that, despite similar cognitive skill levels and background traits, immigrants and natives may apply their skills at work to different extents, yielding a difference in their wage returns. Therefore, disparity in skill use at work plays an important role in explaining the immigrant-native wage gap. This leads us to conclude that immigrants are not yet sufficiently well integrated in European labour markets, and the potential for the development and application of their human capital is still underutilised. Further policy measures should profoundly consider these indications, taking into account that the role of immigrants and their labour supply is increasing remarkably in European societies.