Iza/cepr 11 European Summer Symposium in Labour Economics

Hellerstein and Neumark (1999) developed a very straightforward method to detect wage discrimination using matched employer-employee data. However it may produce biased estimates whenever there is not perfect competition in the labor market or when the discriminated group is segregated into good or bad firms. The purpose of this paper is to develop a test for wage discrimination that completes the Hellerstein and Neumark (1999) approach. To do this I propose to estimate a wage setting equation at the firm level that exploits changes in the native-immigrant composition within firms across time in order to have identification of different wage policies toward those groups. Using matched employer-employee data from Germany. I show that both bias-sources are empirically significant when analysing discrimination against immigrants. I find that immigrants are being discriminated. They receive wages which are 16 percent lower than native workers in the same firm. I also find that immigrants are positively segregated into good firms. I do not find significant evidence in favour of a taste-based discrimination model but I do find evidence against a statistical discrimination model.