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The Labour Market Adjustment of Immigrants in New Zealand Report

2. Background

2.1 International literature

There is a large literature, reviewed in Borjas (1994), Borjas (1999) and Duleep (2008), that examines how well immigrants perform in the host country's economy and the impact that immigrants have on the labour market opportunities of non-immigrants. Analysing the relationship between immigrant earnings and their duration of stay in the United States, seminal work by Chiswick (1978) identified two key features that have been confirmed in most subsequent studies. First, immigrants experience an initial entry disadvantage, having poorer outcomes when they first arrive than comparable native-born workers. Second, relative outcomes for immigrants improve the longer they remain in the host country. Subsequent studies have examined the magnitude and robustness of these patterns across different countries, immigrant groups, and outcomes, and using different analytical methods, and have investigated a range of potential explanations for the observed patterns.

The standard approach to estimating immigrant earnings progress is by regression estimation of an augmented wage equation, modelling wages as a function of human capital and other worker characteristics. Additional variables are then added to estimate the initial wage penalty faced by immigrants, and the degree of improvement as a function of years since migration. Borjas (1985) demonstrated the importance of using longitudinal data on arrival cohorts to control for cohort variation in unobserved human capital. In cross-sectional studies, such as that of Chiswick (1978), a decline over time in cohort 'quality' will lead to an overstatement of post-arrival wage growth. Borjas' study identifies such cohort declines in the United States, and reverses Chiswick's finding that immigrant earnings overtake those of comparable natives after 10 to 15 years - showing instead a pattern of incomplete convergence for recent arrival cohorts.

Even with longitudinal data, there are challenges in separately identifying the influences of the year of arrival, years since arrival, age at arrival, current age and labour market experience, with additional constraints required to enable identification (see Borjas 1999; and McKenzie 2006 for in-depth discussions of this point). Furthermore, with synthetic cohort designs, such as in Borjas (1999), the rate of improvement may be overstated as a result of selective remigration. If immigrants who fare poorly are more likely to leave, average wages of longer duration immigrants will be higher as a result of compositional change, independent of the rate of true improvement (Lubotsky 2007; Beenstock et al. 2005).[3]

A range of explanations have been investigated for the general pattern of entry disadvantage followed by relative improvement. Chiswick (1978) hypothesises that immigrants enter with low levels of local human capital, and that post-entry growth reflects acquisition of local skills and knowledge. Subsequent studies have found support for such a process, as reflected in lower returns to pre-arrival human capital (Friedberg 2000), and investment in local skills (Duleep and Regets 1999; Duleep 2007), language skills (Chiswick and Miller 2001), and job networks (Frijters et al. 2005; Daneshvary et al. 1992). There is also evidence that new immigrants face discrimination in the labour market, which may weaken as the immigrant becomes more integrated in the host country (Riach and Rich 2002).

Although much of the influential United States literature has focused on immigrant earnings rates as a metric of labour market performance, recent studies have investigated other dimensions of the jobs held by immigrants, such as occupational rank, or the mismatch between immigrants' qualifications and their occupation. For example, Chiswick and Miller (2007; 2008) examine cross-sectional variation in wages and occupational allocation of different arrival cohorts to gauge how much of post-arrival increases in wages may be due to shifts between occupations, as opposed to within-occupation wage growth. They find that occupational sorting accounts for over half of the returns to education for non-English-speaking migrants.[4] For these migrants, individuals with higher pre-immigration experience are sorted into lower paid occupations, whereas for English-speaking migrants, occupational sorting enhances the returns to their pre-immigration experience. Liu et al. (2004) finds that within-occupation wage differentials decline over time, complementing the gains from occupational mobility.

Occupational mobility appears to be a more significant feature of wage improvement for immigrants from non-English speaking backgrounds and for less-qualified immigrants. These patterns are consistent with earlier longitudinal analysis in Chiswick et al. (2005), which finds that new immigrants tend to enter lower paying occupations than they were in their source country, and subsequently move into higher paying occupations. This "U-shaped pattern of occupational mobility" is more pronounced for lower qualified immigrants with less transferable skills, and appears to be a stronger pattern in Australia than in the United States. An alternative approach to analysing the role of occupational allocation in immigrant wage growth is to examine patterns of 'overeducation' - whether immigrants have higher levels of qualifications than native workers in the same occupation. Several recent studies have found evidence of immigrant overeducation in several countries, and have shown that immigrants receive low returns to their excess education, interpreting this as evidence of the imperfect transferability of immigrant skills (OECD 2007b; Lindley and Lenton 2006; Green et al. 2007; Sanrom et al. 2008)

The factors and processes that lead to duration-related improvements in the wages and occupations of immigrant jobs are also evident in immigrants' success in securing jobs. Many studies also consider quantity measures of immigrant assimilation, using measures such as employment, self-employment, unemployment and participation rates. (eg, Chiswick et al. 1997; Funkhouser 2000; Husted et al. 2001; Winkelmann and Winkelmann 1998b; OECD 2007a; 2008). While similar generic patterns of entry disadvantage and subsequent improvement are evident for both quantity and price dimensions of labour market success, the relative strength of the two forms of adjustment varies across countries. For example, Antecol et al. (2003) examine differences between Australia, Canada, and the United States and find that wage adjustment dominates in the United States, whereas in Australia, employment adjustment accounts for all of the observed assimilation, with Canada in between. They argue that institutional features of the respective labour markets, such as the "relatively inflexible wages and generous unemployment insurance in countries like Australia" may be at the root of these differences. Similarly, Causa and Jean (2008) compare patterns of immigrant integration in 12 Organisation for Economic Co-operation and Development (OECD) countries and argue that differing labour market policies are a significant influence on the assimilation patterns in different countries.

2.2 Institutional situation in New Zealand[5]

Over the past 30 years, there have been substantial changes to New Zealand immigration policy, though with a maintained focus on selecting migrants with skills that are valued in the New Zealand labour market and who are likely to settle well in New Zealand. Until 1987, skilled migration policy favoured migrants from traditional source countries - primarily the United Kingdom, Western European and North America, with some additional low skill migration from the Pacific Islands, and those in occupations with identified skill shortages, as included on the 'Occupational Priority List' (OPL). The Immigration Act 1987 removed the traditional source country preference and rationalised the OPL system, requiring a firm employment offer for residence applications made on occupational grounds.

The Immigration Amendment Act 1991 represented a fundamental shift in selection policy; replacing the OPL with a points-system (the General Skills Category). Applicants were granted points for employability, age and settlement factors and had to meet certain character and health requirements. Those with the highest scores were selected with the aim of meeting an annual numerical migration target. The policy was maintained until 2003, with modifications to put more weight on English language ability (in 1995 and 2002), on having a job offer (1995), and on having a job offer relevant to the applicant's qualifications and experience (2002). In 2003, the policy was replaced by the 'Skilled Migrant Category' policy, also based on the awarding of points for job offers, work experience, qualifications and age, with additional recognition of partners' employment and experience, New Zealand qualifications, and employment outside Auckland. In 2007, the points schedule was modified to award points for employment, qualifications and experience in specified areas of anticipated future growth, for study in New Zealand, and for partners' skills and experience.[6]

New Zealand currently approves around 50,000 people each year for permanent residence, adding more than 1 percent annually to the New Zealand population. Over the past fifteen years, permanent residence approvals have fluctuated between 30,000 and 55,000 per year. Skilled and business migrants currently account for 60 percent of residence approvals, a figure that has varied between around one-half and three-quarters over at least the past 15 years. Family-related approvals account for most of the remainder, with the balance being approvals reflecting humanitarian and international responsibilities.

A significant direction of change in immigration policy over recent years has been the expansion of temporary migration approvals. Temporary permit approvals have grown markedly; over 180,000 people per year are currently approved for entry under temporary work or student permits up from around 45,000 10 years earlier.[7] The number of people arriving on student permits peaked at around 85,000 in 2002/03 and 2003/04, whereas the number of people admitted on work-related temporary permits has increased consistently, reaching 115,000 in 2006/07. The expansion reflects a strengthened policy focus on labour-market-focused temporary migrants who can bring skills and experience in occupations and areas identified as suffering from skill shortages. Relevant temporary migration policies include long-term business visas, talent visas, job-search visas, the re-establishment of a list of priority occupations, and an expansion of approvals for working holidays.

Overall, the dominant focus of economic migration policy has been on selecting permanent residents and temporary migrants on the basis of their expected labour market contribution and settlement prospects. For both residents and temporary migrants, this might be expected to reduce the entry disadvantage faced by entering migrants, and to result in a relatively rapid convergence of immigrants' labour market outcomes to those of comparable New Zealand-born workers. In addition, strengthened settlement policies aim to improve further the speed and success of settlement for immigrants (New Zealand Immigration Service 2007) .

2.3 Previous New Zealand research

There are relatively few studies that have examined immigrant adaptation in New Zealand and the majority have relied on simple Census tabulations. For example, Poot et al. (1988) analysed adaptation of age-adjusted labour force participation and unemployment rates using 1981 Census data. Poot (1993) extended this with data from the 1981 and 1986 Censuses to examine convergence of median incomes conditional on employment, controlling for age, occupation, country of origin and years since migration. Comparisons of immigrant and native incomes, employment rates and unemployment rates have also been analysed for later Censuses by Boyd (2006). Given the policy focus on skilled migration, there have also been two studies of labour market outcomes for skilled migrants, using data from the 2001 Census data (Statistics New Zealand 2004; New Zealand Immigration Service 2003). Each contains some cohort analyses of employment status or income convergence, and confirms improvements over immigrants' first five to ten years.

The only true microeconometric analysis of immigrant assimilation in New Zealand is that of Winkelmann and Winkelmann (1998a), which presents an extensive range of analyses of immigrant assimilation in terms of incomes, incomes for those employed, employment and participation.[8] The use of unit-record data from three Censuses allows the authors to control for a range of compositional factors, including unobservable cohort effects. They find that new immigrants to New Zealand face an entry disadvantage that diminishes with years of residence, that immigrants from English speaking countries had relatively small initial differentials that tended to disappear within 10 to 20 years of residence, and that Asian and Pacific Island immigrants had larger initial differentials and, in some cases, were predicted not to reach parity with natives over their working careers.

Their composition-adjusted estimates show slower improvements in immigrant outcomes than is evident in unadjusted profiles, suggesting that some of the apparent improvement that is evident in cross-sectional descriptive summaries is a result of more recent cohorts having observable and unobservable characteristics that are associated with poorer outcomes. However, even controlling for characteristics, entry disadvantage is much greater for the most recent 'non-English-speaking background' immigrant arrivals in their sample - those who arrived between 1991 and 1995 - than for previous entry cohorts. Boyd (2006) is able to trace the improvement in outcomes for this arrival cohort by the time of the 2001 Census.[9] She shows that they experienced substantial improvements over their first 5 to 10 years, with employment rates rising from 55% to 69%.

There is limited New Zealand evidence of occupational assimilation processes. Statistics New Zealand (2004) compares the occupational distribution of different arrival cohorts but the patterns show more about the different skills of the cohorts than the process of occupational change for any given cohort. Interestingly, OECD (2007b) finds that, in New Zealand, overeducation affects native workers more than immigrant workers, which is an exception to the general OECD pattern.

Remigration rates of immigrants to New Zealand are high. Winkelmann and Winkelmann (1998a), estimate that 28 percent of arriving migrants depart within 5 years, and 43 percent within 10 years. Boyd (2006) confirms a 5-year remigration rate of 30 percent for the 1996 to 2001 period, and highlights that the rate is as high as 50 percent for those who were 20 to 24 year-old at arrival. If the immigrants who leave have poorer labour market outcomes than the average for their arrival cohort, their departure will raise the average outcomes for the cohort and will give the appearance of post-arrival improvements even if individual migrants experience no such improvements (and vice-versa if immigrants who leave have better labour market outcomes than the average for their arrival cohort).

Mar et al. (2007) compare the composition of migrants in New Zealand less than 5 years in 1996 to the composition of those who are observed in New Zealand 5 to 10 years after arrival in 2001 (ie., the same cohort five-years later). They find that the composition is largely unchanged in regards to the gender composition and age distribution. There is some change in the qualifications distribution but remigration is stronger for those with no qualifications as well as for those with degree qualifications. On balance, this suggests that it is unlikely that changing composition due to selective remigration has a large impact on our estimates of immigrant adaptation.


[3] It is also possible that selective remigration might work in the other direction. This will occur if more successful migrants are more likely to remigrate because they are attracted to other countries offering higher returns to skills, reach target levels of ‘migrant’ earnings more quickly, or gain less from migration than immigrants with generally poor outcomes in New Zealand. Ultimately, this impact of selective remigration on average migrant cohort earnings is an empirical question.

[4] In Australia, occupational sorting accounts for about 3.5 percentage points of the return to education for both migrants and the Australian-born. However, Australian-born workers have higher education returns, so the proportional contribution is higher for migrants. In the United States, the percentage point contribution is 4.8 ppt for United States-born workers and only 3.0 ppt for foreign-born workers, although the proportional contribution is still higher for migrants, due to higher education returns for the United States-born.

[5] This section draws on section 4.9 of Winkelmann and Winkelmann (1998a), OECD (2004) and the very useful ‘Timeline of policy change’ in Merwood (2008). Data are sourced from Winkelmann (2000), NZ Immigration Service (2001), Merwood (2008) and the statistics at http://www.immigration.govt.nz/migrant/general/general information/statistics/.

[6] The administration of the system also changed, from a monthly selection of successful applicants from a ranked pool, to the setting of a monthly pass mark (in 1995), above which acceptance was automatic, and back to a ranked pool – now of prospective immigrants’ ‘expressions of interests’, from which a selected subset are invited to apply for residence.

[7] Some people are counted in both the permanent residence and temporary figures, as around 20,000 of the permanent residence approvals had previously been admitted on a temporary permit, and a growing proportion of permanent residence applications (77% in 2006/07) were received from people already in New Zealand. (Merwood 2008).

[8] A condensed version is published as Winkelmann and Winkelmann (1998b).

[9] Boyd (2006) is also able to control for cohort variation using a synthetic cohort design with data from four censuses to trace out patterns of convergence of average incomes for four cohorts of 26-30 year old recent migrants. The ability to control for a full range of compositional factors is limited by the tabular data that is used.