5 Why is there a decline in relative entry-level earnings among recent immigrants?

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While we do not fully understand the mechanisms by which earnings have fallen, several recent Statistics Canada (and others') studies are in broad agreement that some issues have sizeable impacts, while other issues are less important.

5.1 The changing source countries of entering immigrants and related changing characteristics

Immigrants have now been entering Canada from very different countries than was the case in, say the 1970s. From 1981 to 2001, the share of immigrants from Eastern Europe, South Asia (India, Pakistan), East Asia (China, Korea, Japan), West Asia (Iraq, Iran, Afghanistan) and Africa increased from 35% to 72%. The human capital of immigrants from more recent source regions may initially be less transferable because of the potential issues of language, cultural differences, education quality and discrimination.

Fewer entering immigrants have a home language or mother tongue that is either English or French. Language and communication skills are related to productivity, and hence to the wages of workers. Studies such as those of Frenette and Morissette (2003) and Aydemir and Skuterud (2004)⁷ suggest that perhaps one third of the decline in entry-level earnings is associated with these changing characteristics, particularly the source regions and home language. This is an important amalgam of factors—one that is difficult to disentangle, given the highly interrelated nature of language ability, visible-minority status, culture and source country.

5.2 The credentialism issue

Researchers studying 'credentialism' ask, after accounting for years of schooling, how much is the fact of having the university credential (i.e., degree) itself worth to an immigrant. This is referred to as the 'sheepskin' effect. Is the earnings advantage of having a university degree (relative to not having it) changing? To contribute significantly to the decline in entry-level earnings, the advantage of having a degree (relative to, say, high school) would have to have fallen.

Ferrer and Riddell's (2003) research finds that at least up to 2000, having a degree increased immigrants' earnings significantly (relative to not having a degree), and that this effect was at least as strong or stronger for immigrants than it was for the native born. They conclude that this credential advantage has changed little since the early 1980s for immigrants, at least up to 2000. There is some evidence to suggest it may have declined since 2000.

The 'credentialism' issue appears not to have worsened over the past two decades, and hence it likely contributes little to the decline in entry earnings. Credentialism is no doubt an important issue at any point in time, but it seems to have contributed little to the decline in immigrant earnings, at least up to 2000, the period covered by this research.

5.3 Declining returns to foreign labour market experience

Human capital consists largely of education, training and the skills developed through work experience. One typically expects some return to this human capital when entering employment, but immigrants from non-traditional source countries receive close to zero economic benefits from pre-Canadian labour market experience.

A number of recent studies indicate that the foreign work experience of entering immigrants is increasingly discounted in the Canadian labour market (Schaafsma and Sweetman 2001, Green and Worswick 2002, Frenette and Morissette 2003, Aydemir and Skuterud 2004). Older immigrants entering Canada, who in the late 1970s or early 1980s earned significantly more than their younger counterparts, now have much less of an advantage. Their foreign work experience appears to be more heavily discounted now than it was 20 years ago. This is particularly true for immigrants from the non-traditional source regions, such as Asia and Africa. Immigrants from Western Europe and the United States do not experience this effect.

Green and Worswick (2002), Aydemir and Skuterud (2004) and Frenette and Morissette (2003) concluded that during the 1980s and 1990s the declining returns to experience was one of the major factors, if not the most important, associated with the decline in earnings among recent immigrants. Aydemir and Skuterud conclude that, among recent immigrants, the decline in the returns to foreign experience accounted for roughly one third of the decline in entry-level earnings reported earlier.

5.4 Deteriorating labour market outcomes for new labour market entrants in general, of which immigrants are a part

Labour market outcomes for young labour market entrants, particularly males, have been deteriorating in Canada throughout the 1980s and 1990s (Picot 1998, Beaudry and Green 2000). Entering immigrants are themselves new labour market entrants, and it may be that whatever is causing the decline in earnings of the young in general (not well understood) may also be affecting the earnings of recent immigrants. Green and Worswick (2002), Frenette and Morissette (2003), and Aydemir and Skuterud (2004) find that, for recent-immigrant men, this may have accounted for 40% of the decline in entry-level earnings. They find, however, that this effect was concentrated in the 1980s and that it was less important during the 1990s.

5.5 Strong competition from the increasingly highly educated Canadian born

The supply of highly educated workers in Canada has been increasing at a very rapid pace. The number of women with a university degree in the labour force has quadrupled over just 20 years, while the number of men with degrees has more than doubled.

Reitz (2001) argues that in spite of the rising educational levels of immigrants, their relative advantage in educational levels has declined as a result of the more rapidly rising levels of education among the Canadian born. He also argues that immigrants did not benefit to the same extent as the Canadian born from increases in education, perhaps for the reason noted above.

5.6 A different explanation for the decline in earnings of entering cohorts after 2000

Those immigrant cohorts entering Canada from 2000 to 2005 continued to experience declining earnings at entry. The determinants of this decline are likely very different than those identified in the research focusing on the 1980s and 1990s.⁸

Picot and Hou (forthcoming) find that much of the decline in entry earnings (perhaps two thirds) was concentrated among entering immigrants intending to practice in information technology (IT) or engineering occupations. This coincides with the IT downturn in Canada, which appears to have significantly affected outcomes for these immigrants, particularly men. Compared with the Canadian born, entering immigrants were disproportionately in IT and engineering occupations. Hence, the effect of the IT downturn was more dramatic among immigrants. Following the very significant response by the immigration selection system to the call for more high-tech workers in the late 1990s, which resulted in a rapidly increasing supply through immigration, the large numbers of entering immigrants were faced with the IT downturn.

In summary, research focusing on the 1980s and 1990s found that virtually all of the decline in entry earnings could be accounted for by the shift in source regions and language, the declining returns to foreign experience and the general deterioration in outcomes for labour market entrants in general. More recent research, focusing on the early 2000s, suggest that the high-tech downturn, combined with the increasing concentration of immigrants in IT and engineering professions, accounted for much of the recent decline.

 

⁷ Note that the first of these is more detailed, but focuses only on males, whereas the subsequent papers address outcomes for both sexes.

⁸ More specifically, declining returns to foreign experience were no longer a compelling explanation, as such returns had already fallen to zero (for immigrants from non-traditional source countries) and would have had to become significantly negative to further affect immigrants' earnings in the years after arrival. Likewise, the shift in the source countries from which immigrants arrived was no longer a convincing explanation, as this shift occurred mainly in the 1970s and 1980s and changed little in more recent years. The overall decline in labour market outcomes for new entrants was no longer a possible explanation, as the experiences of new entrants in the late 1990s and early 2000s were generally positive. Hence, one has to look elsewhere for possible causes on the decline in entry earnings.