1 Introduction

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Most of the literature on the evolution of immigrant earnings and the economic progress of immigrants relies on a convenient benchmark such as, for instance, the earnings—income, wealth, employment rates—of the non-immigrants. In many cases, this is an informative comparison, although matching immigrants to non-immigrants in a manner that would make such a comparison meaningful is not always straightforward. In addition to the characteristics that immigrants and non-immigrants share, the economic performance of immigrants may depend on the age at immigration (Schaafsma and Sweetman 2001; Ferrer, Green and Riddell 2006), language ability (Dustmann and Van Soest 2002), share of foreign schooling and foreign experience in the total educational attainment and experience (Chiswick 1978, Betts and Lofstrom 2000, Friedberg 2000, Green and Worswick 2004, Smith 2006), and country of birth (Jasso, Rosenzweig and Smith 2000; Aydemir and Skuterud 2005; Smith 2006).

The success of immigrants can be measured not just in relation to the economic progress of non- immigrants, but also in relation to the economic progress of non-immigrants in the country from which the immigrants have come. For many workers with bleak employment or earnings prospects in their countries of origin, any stable employment in their new country is often a step up, even ifit does not fully correspond to their skills or it falls short of what would be considered acceptable by non-immigrants. Despite the intuitive appeal of such a comparison, however, an obvious problem is that it requires data from the immigrants' countries of origin. For a country such as Canada, with a highly diverse immigrant population, this approach poses an enormous challenge.

An altogether different approach toward the issue of economic well-being of immigrants, which has so far received little attention in the literature, is to look at the over-time changes in the distribution of immigrants' earnings and, more specifically, at the dynamics of earnings inequality and earnings instability among immigrants. Compared with the standard 'immigrants versus non-immigrants' framework, this approach does not need the non-immigrants as a reference point. Instead, it relies on the familiar life-cycle/permanent income theory and the concepts of permanent- and transitory-income components. An increase in income inequality is usually associated with a reduction in social welfare, although its impact must be considered in conjunction with earnings trends (Deaton 1997: 136). A rise in earnings instability may lead to greater uncertainty and lower consumption, particularly if consumption smoothing is costly or impossible because of liquidity constraints (Browning and Lusardi 1996, Browning and Crossley 2001). Therefore, an analysis of immigrants' earnings inequality and earnings instability is a natural extension of the analysis of immigrant labour-market outcomes. Combined with previous studies that compare labour-market outcomes of immigrants with those of the non-immigrants, an analysis of immigrants' earnings instability and earnings inequality may provide further insights into immigrants' welfare dynamics and help assess the effectiveness of recent immigration policies.

One key feature of this study is that it distinguishes between current and long-term inequalities in a way consistent with the recent studies on earnings inequality and earnings instability in Canada and the United States (Gottschalk and Moffitt 1994; Baker 1997; Haider 2001; Moffitt and Gottschalk 2002; Baker and Solon 2003; Beach, Finnie and Gray 2003; Morissette and Ostrovsky 2005). These studies incorporate several features of life-cycle earnings profiles such as, for instance, the heterogeneity of entry earnings and earnings growth rates. None of these studies, however, focus specifically on immigrants.

Although an analysis of immigrants' earnings inequality and instability dynamics may be informative in itself, ultimately we are interested in their underlying causes. In particular, it would be useful to relate earnings inequality and earnings instability to immigrants' education, linguistic ability and cultural background. Such a link would be particularly interesting, since most of the immigrants to Canada came through the 'skilled immigration' program that evaluates potential immigrants based on their age, education level, work experience and language proficiency. Hence, another critical aspect of this study is to gauge the effects of these variables on immigrants' earnings inequality and instability. The analysis of these issues is made possible, thanks to a truly unique Statistics Canada dataset described below.

Our major findings indicate that recent immigrant cohorts have higher levels of earnings inequality than those who came to Canada in the early 1980s. Although foreign education, the ability to speak one of the official languages, and birthplace explain a large part of immigrants' earnings inequality, much of it remains unexplained by these factors. The transitory component of immigrant earnings volatility (earnings instability) dominates the permanent component (earnings inequality) in the first several years after the arrival; later, however, the roles are reversed.

The paper begins with a brief overview of recent trends in immigrant assimilation in Canada (Section 2). Section 3 discusses recently used models of instability and their relevance to this study. The estimation methods used in this study are presented in Section 4. Section 5 describes the data and sample selection. Descriptive results are presented in Section 6, followed by the estimation results in Section 7. Finally, Section 8 highlights major findings and offers possible conclusions.