Wage differentials between foreigners and locals - discrimination or unobserved skills ?

This paper analyzes a regulated trans-border labor market segmented by skills in the Canton of Ticino (Switzerland). Swiss regulation distinguishes two types of foreign labor force, i.e. trans-border commuters with de facto free access and immigrant workers regulated by quota. While wages are generally observed to be lower for trans-border commuters than for locals, immigrant workers accomplishing difficult tasks can earn higher wages than their Swiss counterparts. This can be due to differences in unobserved skills or to regulatory discrimination. In order to shed light on this, we analyze the labor market assuming that firms hire workers setting efficient wages according to a competitive screening model. Estimating a two step switching regression model including dummy variables for the different categories of foreign workers allows distinguish between discrimination and effects of asymmetric information. The bilateral treaties between Switzerland and the EU will introduce free mobility abolishing the current regulation by quota. Speculations abound on the impact this might have on wages. An effect of this liberalization can only be expected if current differentials are found to be due to regulation.