Immigration, Search and Loss of Skill

This paper analyzes the process of entry into the Israeli labor market among a panel of highly skilled immigrants who moved from the former USSR to Israel. We estimate a nonstationary, finite horizon search model with exogenous wage growth that is capable of capturing the main features of this process; a speedy entry into the labor force, an initial phase of work at low skill occupations, a gradual occupational upgrading and a sharp increase in wages. The estimated parameters of the model, together with information on the wages of immigrants from earlier waves, allow us to predict an occupational path and associated wages, for each new immigrant, from the time of arrival until retirement. We compare predicted lifetime earnings at the time of arrival to the hypothetical lifetime earnings immigrants would have received had their imported observable skills been valued in the same way as comparable Israelis. We estimate that, on the average, immigrants can expect lifetime earnings to fall short of the lifetime earnings of comparable Israelis by 42.6 percent. Of this figure, 8.3 percentage points reflect frictions associated with unemployment and occupational mismatch and 34.3 percentage points reflect the gradual adaptation of imported schooling and experience to the local labor market.