The Value of Foreign Language Skills in the German Labor Market

This article explores the relationship between foreign language skills and individuals’ labor income in Germany, focusing on the English language. Using the 2012 and 2016 waves of the German Socio-Economic Panel’s Innovation Sample (SOEP-IS), we find that native speakers of German with English language skills earn a wage premium of 13 percent, on average. Incremental improvements in the level of skills, e.g., from basic to independent user, increase wages by 11 percent, on average. We address endogeneity issues by using novel data that combine comprehensive information about individuals’ characteristics with fine-grained self-assessments of language skills based on descriptors derived from the Common European Framework of Reference for Languages (CEFR). Any remaining sources of endogeneity in the level of language proficiency are addressed by an instrumental variable approach that exploits exogenous variation in individuals’ exposure to foreign language acquisition in school. We also show that wage differentials cannot be explained by the value of foreign language skills as a general ability signal, but they are driven by the productive value of such skills. Finally, by examining language skills instead of the use of such skills in the workplace, we identify individual returns to foreign languages for the general population. As education policy is the main determinant of English language acquisition (not only in Germany), this information is highly relevant for policy-makers.