The Effect of Ethnic Clustering on Migrant Integration in Germany

Since ethnic clustering is common in Germany, a better understanding of its effects on the integration of immigrants could be important for integration policies, especially in the light of rising immigration and a skilled worker shortage. Yet, both economic theory and empirical research for other countries cannot give a clear-cut answer to whether clustering is benefi cial or detrimental for immigrants' integration. In this paper, the effect of residential clustering on the labour market outcome of first-generation immigrants in Germany is analysed empirically. It, thus, contributes to the literature by extending it to Germany on which hardly any research has been conducted. For the analysis, two measures for labour market integration are used: the employment probability and wage levels. In order to control for the endogeneity of the location decision, a two-step strategy is used, combining a control function and an instrumental variable (IV) approach. The results suggest a negative enclave effect on both employment and wages, that is even larger when sorting is taken into account.