The Effect of Literacy on Immigrant Earnings

We use a special Canadian dataset containing both literacy test scores and standard labour market variables to examine the impact of literacy on immigrant earnings. Having a literacy measure allows us to examine issues related to discrimination and the sources of lower returns to foreign acquired education and experience among immigrants. We find that the native-born literacy distribution (assessed in English or French) dominates that for immigrants. However, immigrants and the native born appear to obtain the same return to their literacy skills. We argue that this does not support a discrimination explanation for immigrant-native born earnings differentials. Immigrant shortfalls in literacy can account for about one-half of the earnings gap between university educated immigrants and similarly educated native-born workers. However, low returns to foreign acquired experience have a larger impact on the differential and those low returns are not related to literacy differences. Thus, low literacy among immigrants is an important input to understanding immigrant-native born earnings differentials but is not the dominant explanation.