Information and wage inequality: Evidence on wage differences between natives, immigrants and cross-border workers in Luxembourg
[ InWIn ]

Project supported by the National Research Fund (Luxembourg) (contract C10/LM/785657)

Synopsis

InWIn is a research project funded by the National Research Fund of Luxembourg in its CORE programme (contract C10/LM/785657) for the period March 1 2011-November 30 2013.

The labour market in Luxembourg is characterized by a large fraction of both immigrant workers and foreign cross-border workers residing in neighbouring countries. This unique composition of employment has interesting consequences for outcomes on the labour market. This project focuses on one of these outcomes in particular, earnings inequalities and wage differentials between nationals, immigrants and cross-border workers.

Existing evidence shows that both cross-border workers and immigrants are paid less than natives. The sources of these differentials remain however unclear, particularly for cross-border workers. Additionally, most of the evidence available to date documents differences in mean pay, whereas it is likely that differences between these groups of workers are not satisfactorily described by a given, fixed wage penalty. It is most likely that differences exist according to the kind of jobs held, the origin of workers, their human capital or their work history in Luxembourg, and one may also anticipate the existence of 'glass ceiling' phenomena limiting access of non- resident and/or non-natives to top positions in firms. There is therefore interest in looking at broader distributional differences than at mere differences in mean pay.

Wage differentials are traditionally explained by differences in human capital. Immigrant workers tend to have a human capital deficit with respect to nationals because they may have accumulated human capital that is specific to their country of origin and that is not portable to the destination country. Discriminatory behaviours are also often conjectured to explain wage differentials. These may have direct effects on wages and/or indirect effects through occupational sorting. It is not clear whether these arguments carry over to the case of cross- border workers, however, especially since the latter are likely to have a smaller deficit of country-specific human capital. Other factors may be at play, such as information asymmetries. Foreign workers, when applying for their first job in Luxembourg, are not well informed about wages prevailing in the host country and find themselves in a weaker position than natives when negotiating starting wages. This effect is likely to vanish when cross-border workers acquire better information about the wage structure in Luxembourg and renegotiate wages (either on the job or through job mobility), but this will have an impact on wage differentials at the mean.

This project aims at taking advantage of two rich data sources -namely the Structure of Earnings Survey and a large-scale extraction of anonymized administrative records from the social security database- to undertake a thorough examination of the differences in pay between Luxembourg nationals, immigrant residents and cross-border workers. This will include (i) analysis of overall wage distribution differences (disentangling the impacts thereon of human capital, occupational sorting, and other ‘unexplained’ factors), (ii) detailed analysis of the impact of firm composition characteristics on wages of these three groups of workers, and (iii) analysis of earnings dynamics differences and assimilation processes over a period of thirty years. Results are expected to shed light on the magnitude and causes of differences in pay and on the particular role played by information asymmetries in the relatively atypical labour market configuration of Luxembourg.