Permanent Disadvantage or Gradual Integration: Explaining the Immigrant-Native Earnings Gap in Sweden

Theoretical explanations suggest that wage differentials between immigrant and native workers are generated either by unequal acquisition of human capital between the groups or by various forms of exclusion of immigrants from fair labor market rewards. We evaluate the labor quality and labor market discrimination hypotheses by using a large sample of Swedish employees in 1995. Our findings show that labor market integration is relatively unproblematic for immigrants from Western countries, whereas immigrants from other countries, especially from Africa, Asia, and Latin America, face substantial obstacles to earnings progress when entering the Swedish labor market. For the latter group of countries, extensive controls for general and country-specific human capital reduce the earnings differentials. However, the remaining gap is of a non-trivial magnitude. Thus, the labor quality hypothesis accounts for a part of the observed native-immigrant wage gap, but the remaining differentials can be interpreted in terms of labor market discrimination.