Foreign Vs. German Wage Differentials in Germany: Does the Home Country Matter?

Abstract

The German labour force is expected to shrink in the next two decades due to a decline in population. Therefore, the immigration of workers from abroad could compensate for potential negative consequences of such population decline. Is Germany competitive for immigration-i.e., do German employers pay enough to make it attractive as a destination country? We explore the wage gap between foreigners and German employees in particular and focus on different countries of origin to better understand issues related to wage setting among these groups. For this purpose, a threefold Oaxaca-Blinder decomposition is performed using comprehensive data with a vast amount of information on a large number of workers and firms. The results suggest that most of the wage gap can be explained by observed characteristics, and in most cases, very little difference remains unexplained. We provide evidence on differences specific to the country of origin which could be taken into consideration to attract people from abroad to better integrate them into the German labour market.