This study uses the concept of stochastic frontiers for testing the assimilation hypothesis in the West-German labor market. Estimation of a potential rather than an average earnings function increases the explanatory power of the human capital approach and allows for the determination of individual levels of income efficiency. The results imply that immigrants from East Germany and Eastern Europe exhibit a significantly steeper earnings profile than natives, clearly supporting the assimilation hypothesis for this group. Ten years after arrival immigrants reach „wage parity“ with West Germans. Surprisingly, only small differences could be observed with regard to the question of earnings efficiency. On an average, inhabitants as well as immigrants transformed about 75% to 80% of their potential income into actual earnings. The reasons for the individually diverging efficiency ratios are not well understood, with the market power of small firms against their employees being identified as the most important source.
JEL classification: J31, J61
Keywords: Immigration, Assimilation, Earnings Frontier
Dr. Günter Lang, wiwi-Fakultät, Universität Augsburg,
Universitätsstraße 16, D-86159 Augsburg, Germany, Phone
+49-821-598-4195, Fax +49-821-598-4230,
e-mail: Günter Lang