Executive summary

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Most of the literature on the evolution of immigrant earnings and 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 way that would make such a comparison meaningful is not always straightforward. An altogether different approach to the issue of economic well-being of immigrants, which so far has 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. As economic theory suggests, 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.

This study relies on the life-cycle/permanent-income theory and the concepts of permanent and transitory income components to distinguish between current and long-term immigrant earnings inequality in a way consistent with the recent studies on earnings inequality and earnings instability in Canada and the United States. Our descriptive analysis shows that earnings inequality accounts for a larger portion of the immigrant earnings dispersion than earnings instability; earnings inequality is higher for more recent cohorts than for those who arrived in the early 1980s; and, earnings instability is highly pro-cyclical—immigrants who arrived just before or during the recession in the early 1990s have experienced higher levels of earnings instability than did earlier cohorts.

Although an analysis of immigrants' earnings inequality and earnings instability dynamics may be informative in itself, ultimately we are interested in their underlying causes. In particular, this study relates earnings inequality and earnings instability to immigrants' education, language ability and cultural background. Such a link is especially interesting, since most immigrants to Canada come through the 'skilled immigration' program that evaluates potential immigrants according to 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.

Generally, the region of birth has the strongest impact on earnings inequality, while the impacts of a foreign education and the ability to speak an official language vary from cohort to cohort and across arrival-age groups. Although controlling for education, language ability and origin reduces earnings inequality, it has very little effect on earnings instability. It is important to note that even after controlling for education, language and birthplace, a large portion of immigrant earnings inequality remains unexplained.

The flexible econometric model used in this study provides further insights into immigrants' earnings inequality and earnings instability dynamics. In particular, there seems to be considerable evidence of cohort effects in earnings inequality, which is consistent with the descriptive results that show the presence of cohort effects and higher levels of earnings inequality for more recent cohorts. Compared with the earnings inequality of the pre-1992 cohorts, the earnings inequality levels of the post-1992 cohorts are substantially higher in the first year after their arrival and remain higher in the next several years during which these cohorts are observed. The inequality levels of all pre-1992 cohorts rose in 1990 and 1991, and then they declined during the 1993-to-1995 period. For all immigrants in the sample—with the exception of the 1980-to-1982- and 1998-to-2000-arrival cohort—the permanent variance was rising during the first four years of the current decade. Unlike the earlier cohorts, the earnings inequality of recent cohorts appears to have been rising slowly but steadily after a decline during the first post- arrival years.

For most immigrant cohorts, earnings instability is particularly high among those immigrants just entering the labour market, but it falls sharply during the subsequent two or three years. The total earnings variance in the first several post-arrival years is mostly driven by the transitory component, while the permanent component becomes predominant once immigrants settle down in their new country. Therefore, it is not surprising that the recession of the early 1990s had a greater impact on the total earnings volatility of the 1989-to-1991 and 1986-to-1988 cohorts than it did on previous cohorts; for these recently arrived cohorts, the transitory component played a more important role in their total earnings volatility.

The impact of immigrants' origins on earnings inequality generally increases in the first several years and it remains strong long after their entrance to the labour market. For the earlier cohorts, which are observed for the longest periods of time, we see that the birthplace effect is actually stronger some 10 to 20 years after their arrival than it was in the first several years. Finally, similar to the birthplace, the effect of education is somewhat weaker for more recent cohorts, although its relative importance is greater. For the most recent cohorts, after several years, a foreign education plays as important a role in reducing earnings inequality as their birthplace does (although this result should be considered with caution, as the effects of education cannot be disentangled from unobserved factors they may be correlated with, such as, for instance, personal motivation, discipline and initiative). All in all, these results seem to indicate that the importance of a foreign schooling—and unobserved individual characteristics it may be correlated with—is increasing as immigrants adjust to the demands of the Canadian labour market.