The Savings Behavior of Immigrants in Germany

Transcription

1 The Savings Behavior of Immigrants in Germany Inauguraldissertation zur Erlangung der Würde eines Doktors der Wirtschaftswissenschaft der Fakultät für Wirtschaftswissenschaft der Ruhr-Universität Bochum vorgelegt von Diplom-Volkswirt Mathias Sinning aus Rotenburg an der Fulda 2007

2 Dekan: Prof. Dr. Stephan Paul Referent: Prof. Dr. Thomas Bauer Korreferent: Prof. Dr. Christoph Schmidt, Ph.D. Tag der mündlichen Prüfung: 12. Februar 2008 ISBN

3 CONTENTS 1. Introduction and Overview The German Immigration Experience Past and Presence The Current State of Discussion The Decision to Migrate The Economic Performance of Immigrants The Economic Impact of Immigration on the Labor Market Contributions of the Thesis The Savings Behavior of Temporary and Permanent Migrants in Germany Introduction The Savings Differential between Natives and Immigrants Data, Econometric Method and Decomposition Analysis Data Econometric Method and Decomposition Analysis Estimation Results OLS and Tobit Estimates Decomposition Analysis The Role of Family Ties Conclusions 41

4 ii 3. Determinants of Savings and Remittances Empirical Evidence from Immigrants to Germany Introduction Determinants of Migrants Remittances Empirical Strategy and Data Results Savings and Other Transfers Transfers to Persons Abroad Conclusions A Comparative Analysis of the Nativity Wealth Gap Introduction The Nativity Wealth Gap Institutional Setting Immigration Policy Labor Markets Financial and Housing Markets Welfare and Pension Systems Data and Descriptive Analysis Data Sources The Level of Net Worth Determinants of Net Worth Decomposition of the Wealth Gap Decomposition Method Decomposition Results Conclusions and Directions for Future Research 108

5 iii 5. Wealth and Asset Holdings of Immigrants in Germany Introduction Wealth and Asset Holdings of Immigrants Data and Descriptive Analysis Data Multiple Imputation of Wealth Components Descriptive Statistics Determinants of Net Worth Components and Diversification Decomposition Analysis Empirical Strategy Decomposition Results Conclusions Home-ownership and Economic Performance of Immigrants in Germany Introduction Home-ownership, Assimilation and Housing Quality The Home-ownership Gap The Assimilation Process Housing Quality Empirical Strategy and Description of Data Home-ownership Gap and Assimilation Housing Quality Empirical Results Conclusions Summary and Conclusions 174 Bibliography 179 Acknowledgements 193

6 1. INTRODUCTION AND OVERVIEW As a result of the increasing relevance of international migration, the integration of immigrant minorities into the society of their host country has become a matter of intense debate among economists and policy makers in many immigration countries worldwide. Following the seminal contribution by Chiswick (1978), the literature on the economic performance of immigrants has largely concentrated on the extent to which labor market outcomes (e.g., earnings and employment status) of immigrants vary over the settlement process (Borjas, 1994; Zimmermann, 2005). Despite its importance, only a few contributions rely on more long-run indicators of the overall economic well-being, such as savings rates, wealth and asset holdings, or home-ownership (Amuedo-Dorantes and Pozo, 2002; Cobb-Clark and Hildebrand, 2006a; Borjas, 2002). Such long-run indicators of economic integration, however, may provide additional insights to the integration process of migrants, because they do not only measure current integration but also allow to draw inferences about the future economic situation of immigrant minorities. An investigation of the wealth accumulation behavior of immigrants is particularly relevant with respect to the economic and social consequences of population aging. In the coming decades, many industrialized countries will experience a dramatic expansion in the proportion of the population over the age of 65 along side a constant, or in some countries even declining, workforce-age population (Gruber and Wise, 2001; Visco, 2001). As a result of the demographic change, private savings have become increasingly relevant in many countries with a pay-as-you-go pension system to supplement public pensions after retirement. In this thesis, the savings behavior and the resulting wealth position of immigrants are being investigated. The empirical analysis focuses predominantly on the immigrant population in Germany but also comprises international comparisons. The

7 1. Introduction and Overview 2 aim of this introductory chapter is to provide a general motivation for this analysis. Section 1.1 briefly describes the German immigration experience since World War II and outlines the current situation. A brief overview of the current state of discussion of the economic migration literature is provided in Section 1.2. Finally, Section 1.3 clarifies the contributions of this thesis to the economic literature and summarizes the main findings and implications of the succeeding chapters. 1.1 The German Immigration Experience Past and Presence This section outlines the West German immigration experience after World War II and describes the current immigrant population in Germany with respect to three important dimensions: (i) ethnic composition, (ii) age structure, and (iii) period of immigration. It will become transparent that a substantial share of the immigrant workforce is reaching retirement age in the coming decades. Germany has been a major immigration country in Western Europe ever since World War II, although the composition and magnitude of immigration flows varied substantially over time. Schmidt and Zimmermann (1992) differentiate four phases of migration to Germany: (i) the war adjustment phase ( ), (ii) the manpower recruitment phase ( ), (iii) the consolidation phase ( ) and (iv) the dissolution of socialism and its aftermath (since 1988). Figure 1.1 presents the gross immigration and emigration flows and the net migration flow in Germany from 1950 to In the first period after the Second World War until 1950, 11.5 million Germans relocated from Eastern Europe, with about eight million coming to West Germany (Schmidt and Zimmermann, 1992). While the Western part of Germany experienced substantial immigration streams after this period, the eastern part received only moderate numbers of immigrants. In the 1950s, ethnic Germans from Eastern Europe and Germans originating directly from the eastern part of Germany moved to West Germany (Schmidt, 1996). Between 1950 and the construction of the Berlin Wall in 1961, 2.6 million Germans relocated from East to West Germany (Schmidt and Zimmermann, 1992). 1 Bauer et al. (2005a) provide a detailed description of the migration flows to Germany since the Second World War.

8 1. Introduction and Overview 3 The second period from 1962 to 1973 was characterized by labor migration. West Germany pursued a policy of active guest worker recruitment to fill an acute shortage of low-skilled labor. A guest worker system was established by means of a series of recruitment treaties with several South European countries (Greece, Italy, Portugal, Spain, Turkey, and Yugoslavia), as well as Morocco and Tunisia to retain the manufacturing-led growth performance of the German economy (Zimmermann, 1995; Fertig and Schmidt, 2002). Although the guest workers were expected to return to their countries of origin after their contracts expired, many of them decided to stay in Germany permanently (Bauer et al., 2005a). Figure 1.1: Gross and net migration flows from 1950 to 2006 I II III IV Year Immigration Net migration flow Emigration Note. Source: Statistisches Bundesamt, Fachserie 1, Reihe 1.2 (I: War adjustment, II: Manpower recruitment, III: Consolidation, IV: Aftermath of socialism). As a result of the first oil crises and the beginning of a recession, active recruitment of guest workers was halted and immigration to Germany was restrained in This third period of immigration to Germany lasted until During this period, family reunification and asylum became the two major channels of legal immigration. These channels and the higher fertility rate of immigrants were responsible for an increase in the foreign population between 1973 and 1988 (Bauer et al., 2005a).

9 1. Introduction and Overview 4 The fourth period of immigration to Germany started in 1989 with the dissolution of socialism, leading to an inflow of immigrants from Central and Eastern Europe. A sizeable part of these immigrants were ethnic Germans. At the same time, Germany experienced a strong inflow of refugees and asylum seekers during the civil war in Yugoslavia. Almost half a million refugees migrated to Germany in 1992 alone. Overall, Germany received 1.5 million new immigrants in 1992, leading to a net migration of about 800,000 (Zimmermann, 1995; Bauer et al., 2005a). Various restrictive administrative regulations by the German government were responsible for the decline of ethnic Germans arriving in Germany in the 1990s (see Münz and Ohlinger, 1998). The present ethnic composition of the immigrant population in Germany is the result of the German immigration experience since the end of the Second World War. While immigration to Germany until the early 1970s was dominated by labor migration from southern European countries, the composition of the immigrant population has changed substantially with the dissolution of socialism and the Figure 1.2: The Composition of Non-Citizens in Germany in 2004 European Union Bosnia and Herzegovina Croatia Romania Russian Federation Serbia and Montenegro Ukraine Turkey Africa America Asia Australia and Oceania Stateless and Unknown ,000 1,500 2,000 2,500 Thousands Note. Source: Statistisches Bundesamt (2006).

10 1. Introduction and Overview 5 increased inflow of people from Eastern Europe. The immigrant population has become even more heterogenous with the inflow of refugees and asylum seekers during the civil war in Yugoslavia. Figure 1.2 depicts the ethnic composition of non-citizens in Germany. The numbers reveal that the majority of the foreigners residing in Germany in 2004 originates from a European country, with Turkish citizens representing the largest group. Citizens of member countries of the European Union constitute about 31.7% of the stock of foreigners residing in Germany, while 26.1% of the foreign population originate from Turkey and another 10.1% from former Yugoslavian countries. Figure 1.3: Age Distributions of Natives and Immigrants, 2004 Density Age Natives Immigrants Note. Based on own calculations, Mikrozensus Variations in the magnitude of immigrant influx since World War II have shaped the present age distribution of the immigrant population in Germany. In addition, the age structure of the current stock of immigrants was influenced by variations in the typical age at arrival over time (Fertig and Schmidt, 2002). Figure 1.3 includes the age distributions of natives and immigrants in Germany in The distributions reveal that a substantial share (18.2%) of the native population has already

11 1. Introduction and Overview 6 reached retirement age, while only 7.7% of the immigrant population in Germany is above 65 years old. In contrast, while 83.2% of the immigrants in Germany belong to the workforce-age population, only 62.0% of the native population is between 18 and 65 years old. Finally, 19.8% of the native population and 9.1% of the immigrant population is below 18 years old. Figure 1.4: Age Distribution of the Natives and Immigrants by Immigration Cohort, 2004 Density IV III II I Age Natives I: Immigration Cohort II: Immigration Cohort III: Immigration Cohort IV: Immigration Cohort Note. Based on own calculations, Mikrozensus 2004 (I: War adjustment, II: Manpower recruitment, III: Consolidation, IV: Aftermath of socialism). Although most of the immigrants currently residing in Germany are between 18 and 65 years old, substantial differences in the age distributions between immigration cohorts exist. Figure 1.4 presents the age distributions of natives and immigrants by immigration cohort. The distributions reveal that the major part (52.3%) of the first immigration cohort arriving from 1950 to 1961 is older than 65 years. Moreover, 33.3% of the first immigration cohort and 58.3% of the second immigration cohort that immigrated from 1962 to 1973 reaches the age of 65 within the next 15 years. At the same time, the share of natives between 50 and 65 years is

12 1. Introduction and Overview 7 only 18.9%. Immigrants above 50 years represent 28.6% and 14.0% of the cohorts arriving in the third ( ) and fourth immigration period (after 1988), respectively. The extent to which these immigrants are able to finance consumption after retirement will depend among other factors on their capacity to accumulate private savings during their work life. 2 The age distributions given in Figure 1.4 indicate that the share of the immigrant workforce-age population in the overall foreign-born population may decrease substantially in the coming decades. However, changes in the age structure of the immigrant workforce-age population also depend on fertility rates and the age structure of future immigration cohorts. In addition, return intentions and the age at return affect the shape of the age distribution of the immigrant population (see, e.g., Schmidt, 1994; Dustmann, 1996). The German immigration experience and the descriptive evidence provided in this section may serve as a departure point for many questions of economic migration research. In fact, a considerable amount of economic migration research has been carried out over the past decades in many immigration countries. The following section gives a brief overview of the economic migration literature. Detailed literature surveys will be provided in each of the following Chapters 2 to 6 of this thesis. 1.2 The Current State of Discussion The economic migration literature may be conceptualized into three broad research areas that are closely related to each other (Fertig and Schmidt, 2002): (i) the decision to migrate, (ii) the economic performance of immigrants in their host country, and (iii) the economic impact of immigration on the destination country. This section outlines the current state of discussion with respect to these research areas. Since this thesis aims at contributing to the literature on the economic performance of immigrants, particular attention will be paid to the second research area The Decision to Migrate The first research area concentrates on the analysis of the determinants of the decision to migrate. Since the migration decision is typically the outcome of a selection 2 About 1.5 million immigrants in Germany are between 50 and 65 years old. Nearly two million immigrant workers will reach retirement age within the next 20 years. More than 650,000 immigrant workers are above 55 years old (Source: Statistisches Bundesamt, Fachserie 1, Reihe 2.2).

13 1. Introduction and Overview 8 process, immigrants are not representative for the populations in their home and host countries. Borjas (1987) develops a theoretical model of the impact of selfselection processes on the characteristics of immigrants. He demonstrates that the incentive of certain individuals to emigrate is caused by differences in the wage distributions of the home country and the United States. Based on this result, Borjas (1987) argues that a negative selection of immigrants regarding their skill levels takes place in source countries with high returns to skill and high wage dispersion, while the selection process is positive in source countries with low returns to skill and relatively low wage dispersion. Empirical studies on the determinants of immigration to Germany have focused predominately on the prediction of aggregate migration streams (Katseli and Glytsos, 1986; Karras and Chiswick, 1999; Fertig, 2001; Vogler and Rotte, 1998; Fertig and Schmidt, 2000), departing from the seminal contributions by Sjaastad (1962) and Harris and Todaro (1970). Fertig and Schmidt (2000) provide a survey of existing aggregate-level studies on international migration in the German context and argue that the existing studies were unable to produce stable results on important determinants of migration (such as wages and employment rates), because they employ ad hoc specifications of historical data and extrapolate from the resulting estimates on the basis of conditioning information that is assumed to be known with certainty. Fertig and Schmidt (2000) address this extrapolation problem formally and apply it to the prediction of future migration flows to Germany from Eastern Europe as a result of EU-enlargement. They compare different scenarios that predict a rather moderate increase in immigration to Germany The Economic Performance of Immigrants To investigate the extent to which immigrants have the ability to integrate successfully into the society and the labor market of their host country, various indicators of the economic performance of immigrants have been considered in the literature. Existing research on the economic performance of immigrants in their host country follows the seminal contributions of Chiswick (1978) and Borjas (1985). Using cross-sectional data, Chiswick (1978) finds that the earnings of recently arrived immigrants are significantly lower than the earnings of more established immigrants. Moreover, since immigrant earnings increase with the duration of residence in the host country, earnings profiles of immigrants assimilate to those of natives. In his

14 1. Introduction and Overview 9 work on the earnings assimilation of immigrants, Borjas (1985) demonstrates that the cross-sectional estimate of the parameter of years since migration proposed by Chiswick (1978) implicitly assumes that the average socioeconomic characteristics of successive immigration cohorts do not change. He shows that the duration effect is exaggerated when comparing more established and recent immigrants in a crosssection. 3 Based on this research, Duleep and Regets (2002) provide theoretical and empirical evidence for a systematic inverse relationship between immigrant entry earnings and earnings growth. They argue that when immigrant entry earnings decline, crosssectional models will over-estimate the earnings growth of more established cohorts, while the decomposition of cross-sectional estimates proposed by Borjas (1985), which assumes stationarity in immigrant earnings growth, will underestimate the earnings growth of more recent cohorts. Duleep and Regets (2002) attribute the unexplained decline in entry earnings of immigrants in the United States to a change in skills transferability rather than a decline in innate ability. Friedberg (2000) examines the transferability of human capital of immigrants to Israel and partly confirms these findings. Numerous studies have investigated the economic performance of immigrants in different immigration countries (see, e.g., Borjas, 1994; Zimmermann, 2005). the German context, several studies have examined the wage performance of immigrants. 4 These studies have generated rather mixed results. Dustmann (1993) and Schmidt (1997) find that the initial earnings gap between guest workers and comparable natives does not disappear with the duration of residence over time. Initial earnings differentials could be explained by country-of-origin differences (Schmidt, 1992) or persistent differences in the educational endowment between guest workers and natives (Schmidt, 1997). Dustmann (1993) argues that the lack of earnings assimilation of guest workers may partly be attributed to their return intentions. Since 3 Additional strands of the literature on the economic performance of immigrants investigate the relationship between ethnic enclaves and economic success (see, e.g., Borjas, 2000; Edin et al., 2003), the relevance of language-skills for economic integration (Dustmann and van Soest, 2002; Berman et al., 2003) and the location choices of immigrants (Bartel, 1989; Borjas, 1999; Card, 2001; Bauer et al., 2005b; Kaushal, 2005). 4 A few studies have also analyzed the assimilation of immigrants to Germany in terms of their In employment and unemployment experiences. literature. Bauer et al. (2005a) provide an overview of this

15 1. Introduction and Overview 10 guest workers were expected to return to their home country after a certain period, their incentives to invest in country-specific human capital was very low, resulting in a permanent earnings gap between guest workers and comparable natives. In contrast to these findings, Pischke (1992) provides evidence for an earnings assimilation of guest workers who immigrated after Schmidt (1993) demonstrates that the assimilation of blue-collar guest workers takes place after about 17 years of German residence. After controlling for potential sample selection bias caused by return migration and the employment status of guest workers, Licht and Steiner (1994) find that guest workers assimilate even faster. The findings of Constant and Massey (2005) indicate that guest workers reach parity with natives after about 23 years. Finally, Fertig and Schurer (2007) investigate the assimilation in earnings and unemployment probabilities of different groups of immigrants relative to comparable natives. Their estimates suggest suggest that an earnings assimilation does only take place among ethnic Germans and the youngest group of immigrants who arrived between 1988 and While existing studies have mainly concentrated on migrants economic performance in terms of earnings and employment status, almost nothing is known about the long-run economic performance of immigrants. In particular, only a few studies rely on more long-run indicators of the overall economic well-being, such as savings rates, wealth and asset holdings, or home-ownership (see, e.g., Amuedo-Dorantes and Pozo, 2002; Cobb-Clark and Hildebrand, 2006b; Borjas, 2002). Such long-run indicators of economic integration, however, may provide additional insights to the integration process of migrants, because they do not only measure current integration but also allow to draw inferences about the future economic situation of immigrant minorities. Amuedo-Dorantes and Pozo (2002), for instance, find lower savings rates for immigrants to the United States than for natives. They argue that the apparent lower precautionary savings of immigrants may be caused by the fact that immigrants engage in precautionary saving by remitting parts of their income to their home countries. Cobb-Clark and Hildebrand (2006b) show that foreign-born households in the United States are less wealthy than their US-born counterparts. Their findings further indicate that the diversity in wealth levels can be attributed primarily to differences between source-regions rather than differences between entry-cohorts, while the year

16 1. Introduction and Overview 11 of arrival is significantly related to the portfolio choices of the foreign-born population in the United States. Borjas (2002) demonstrates that the residential location choice plays a decisive role for the home-ownership gap between US-born and foreign-born households. In addition to the home-ownership gap between native and immigrant households, Borjas (2002) finds substantial differences in the housing tenure choice within the immigrant population. He shows that the national origin of immigrants represents an important factor of the propensity to own a house and argues that the changing nationality mix of the immigrant population has been a driving factor of the increasing differences in home-ownership between foreign-born and US-born households The Economic Impact of Immigration on the Labor Market The literature on the economic impact of immigration focuses mainly on the analysis of labor supply effects induced by immigration. The empirical challenge of this literature is to identify an exogenous increase in the supply of immigrants to a labor market. An endogeneity problem arises, because variations in immigration are typically not randomly distributed (see, e.g., Card, 1990). Existing studies have either used instrument variables or data of historically unique events to identify the effects of immigration on labor market outcomes. Card (1990), for instance, describes the effects of the so-called Mariel Boatlift of 1980 on the Miami labor market. In a related study, Hunt (1992) examines the impact of repatriated immigrants from Algeria in 1962 on the French labor market. Altonji and Card (1991) use previous immigrant density as an instrument to identify the effects of immigration on different labor market outcomes of less-skilled natives. Friedberg (2001) investigates labor market effects of Russian immigrants to Israel, using immigrants former occupation in Russia as an instrument. On balance, these studies find that the effect of immigration on labor market outcomes of native workers is rather small. Similar results were generated by several studies on the labor market effects of immigration in the German context (see, e.g., DeNew and Zimmermann, 1994; Pischke and Velling, 1997; Bauer, 1998; Bonin, 2005). In contrast, a few studies argue that immigration seems to be considerably more harmful than previously thought (see, e.g., Carrington and de Lima, 1996; Borjas, 2003). 5 5 Another strand of the literature has examined the effects of immigration on the welfare system (Bonin (2002, 2006), for instance, provides empirical evidence on the fiscal effects of immigrants to Germany). Moreover, recent studies have started to investigate attitudes towards immigrant

17 1. Introduction and Overview Contributions of the Thesis This section clarifies the contributions of this thesis to the economic migration literature and summarizes the main results of the following five chapters. Chapters 2 and 3 of this thesis concentrate predominantly on the analysis of migrants savings and remittances, while Chapters 4 and 5 examine the relative wealth position of immigrants. Chapter 4 investigates the wealth gap between native and immigrant households in Australia, Germany and the United States. Differences in wealth and asset holdings between natives and immigrants in Germany are being examined in Chapter 5. Finally, Chapter 6 analyzes the home-ownership gap between native and immigrant households in Germany. Although each of the following chapters focuses on a different set of research questions, the investigations of these chapters are interrelated and shed light on various aspects of migrants savings behavior in Germany that have so far not been addressed by the economic migration literature. The German Socio-Economic Panel (SOEP) represents the main source of data for the analysis of immigrants to Germany. The SOEP is a representative longitudinal survey including German and immigrant households that started in The Panel provides information on savings, transfers to persons abroad, wealth and asset holdings, and home-ownership of native and immigrant households. The data includes information about a variety of socioeconomic and demographic characteristics, household composition, occupational biographies, etc. Since less than 5% of the foreign-born population in Germany lives in East Germany (see, e.g., Statistisches Bundesamt, 2006), the empirical investigations concentrate on West Germany. In addition to the SOEP, data from the Household, Income and Labor Dynamics in Australia (HILDA) Survey and the American Survey of Income and Program Participation (SIPP) are being utilized for international comparisons (see Chapter 4). Furthermore, complementary cross-sectional information from the German Mikrozensus are being employed in Chapter 2. Detailed data descriptions will be provided in each of the Chapters 2 to 6. Chapter 2 of this thesis (co-authored by Thomas Bauer) examines differences in the savings rates between native and immigrant households in West Germany, distinguishing temporary and permanent migrants. The chapter contributes to the existing migration literature by providing evidence on the economic integration of minorities (see, e.g., Dustmann and Preston, 2001; Fertig and Schmidt, 2002; Card et al., 2005; Brenner and Fertig, 2006).

18 1. Introduction and Overview 13 immigrants in Germany using savings rates rather than labor market outcomes that have typically been addressed in the literature (e.g., earnings and employment status). Moreover, the chapter analyzes whether savings rate disparities between natives and immigrants are due to different socioeconomic characteristics or differences in individual preferences for savings. In addition, we contribute to the understanding of the effects of the migration motive on economic assimilation. Finally, we provide further evidence on the importance and the use of remittances. Our findings reveal significant differences in the savings rate between Germans and immigrants. However, these differences become smaller when taking remittances of temporary migrants into account. We apply the Blinder-Oaxaca decomposition method for Tobit models developed by Bauer and Sinning (2007) to decompose the savings rate differential and find that more than half of the gap between native Germans and permanent migrants as well as between temporary and permanent migrants may be explained by differences in socioeconomic characteristics. We further investigate whether the unexplained part of the savings gap is correlated with interest rate differentials between Germany and the countries of origin. Our results indeed indicate that the unexplained part of the savings gap between immigrants and natives is relatively large if interest rates in the countries of origin are higher than in Germany and remittances are not considered. If we treat remittances as savings, however, we find that the coefficient of correlation between the unexplained parts of the savings gap and the interest rate differential becomes insignificant. Finally, analyzing differences in the probability of receiving transfers from relatives provides no indication that immigrant households save less because they are more likely to receive transfers from relatives upon retirement than comparable native households. The determinants of migrants transfers to their home countries are being investigated in Chapter 3 of this thesis. Particular attention is paid to their return intentions and household composition in the home and host country. In the empirical analysis, different types of transfers are distinguished, namely savings, payments to family members and other persons abroad as well as transfers that are sent to the home country for other reasons. Chapter 3 contributes to the existing literature in several respects. Firstly, empirical evidence on the determinants of migrants remittances is generated by examining

19 1. Introduction and Overview 14 micro-level data from immigrants to Germany. While the major part of the existing literature on remittances mainly concentrates on migrants transfers to developing countries, the analysis focuses on remittances of migrants from traditional laborexporting countries, such as Turkey, Italy and Greece as well as refugees originating from former Yugoslavian countries. Secondly, in addition to migrants payments to family members in their countries of origin which are typically addressed by the literature on remittances, the analysis of German data allows an explicit consideration of migrants savings in their home countries as a relevant part of their overall transfers. Finally, a double-hurdle model is applied to account for differences between the stochastic processes that determine the decision of immigrants to remit and the level of remittances. Existing studies have often adopted more restrictive models for binary or censored dependent variables to assess the determinants of migrants remittances. The empirical findings of Chapter 3 reveal that return intentions positively affect financial transfers of immigrants to their home country. Moreover, while the effect of the household size on migrants transfers abroad turns out to be significantly negative, remittances are higher if close relatives live in the sending country. Women are less likely to send transfers abroad and given that their payments are positive also send smaller amounts abroad than comparable men. While the current gross income increases migrants savings and payments to persons abroad, the variation of past income streams increases the amount of other transfers to the sending countries, indicating that these transfers represent insurance payments to some extent. Finally, Vuong-tests indicate that the double-hurdle model is the correct specification for the analysis of remittances rather than the conventional Tobit model usually applied in the literature. Chapter 4 of this thesis (co-authored by Thomas Bauer, Deborah Cobb-Clark and Vincent Hildebrand) analyzes the relative wealth position of immigrant households residing in Australia, Germany and the United States. We take advantage of recent data collections in each of these countries that provide a unique opportunity to assess the wealth position of immigrant households. Differences in survey design and coverage prevent us from directly comparing wealth levels across countries. However, following studies on cross-national differences in the gender wage gap (Blau and Kahn, 1992), we assess how the nativity wealth gap differs across countries. In particular, we examine how household net worth varies by nativity status, region

20 1. Introduction and Overview 15 of origin and immigration cohort. Moreover, we assess the extent to which income differentials, disparities in educational attainment and demographic characteristics contribute to the wealth gaps between native and immigrant households. Finally, we discuss the role of the institutional setting in generating any nativity wealth gap. Our results indicate that income differentials are responsible for a minor part of the gap between native and immigrant households in all three countries. Wealth differentials are largely the result of disparity in the educational attainment of the native and immigrant populations in Germany and the United States. While differences in demographic characteristics explain a sizeable part of the nativity wealth gap in the United States, their contribution to the gap between German- and foreignborn households is insignificant. In contrast, the relatively small nativity wealth gap in Australia exists mainly because immigrants to Australia do not translate their relative educational and demographic advantage into a wealth advantage. Chapter 5 contributes to the existing literature by investigating differences in the magnitude and composition of wealth between German natives and immigrants and examining the reasons for these differences. Since portfolio allocations may be responsible for a sizeable part of the nativity wealth gap, particular attention is paid to differences in composition and diversification of asset portfolios between native-born and foreign-born individuals in Germany. In the empirical analysis, the contributions of income differentials, disparities in educational attainment and demographic characteristics to differences in wealth and asset holdings between natives and immigrants are being examined. The empirical results reveal considerable differences in wealth and asset holdings between natives and immigrants. Moreover, disparities in real estate constitute the major part of different levels of net worth, suggesting that disparities in homeownership rates are responsible for the main part of the overall wealth gap. Furthermore, migrants degree of portfolio diversification is significantly lower than that of comparable natives. The results of a decomposition analysis suggest that differences in wealth and asset holdings may be explained by disparity in educational attainment to a sizable extent, while the effects of income differentials and differences in demographic characteristics are insignificant. The estimates of the single components of wealth reveal that educational attainment is highly relevant for the investment in financial and other assets as well as private insurances but relatively

21 1. Introduction and Overview 16 less important for the accumulation of real estate. Finally, in most cases, more than half of the gap in wealth and asset holdings remains unexplained by differences in income, education, and demographic characteristics between natives and immigrants. The empirical findings of Chapter 5 indicate that the nativity wealth gap is mainly attributable to home-ownership disparities between natives and immigrants. Therefore, Chapter 6 investigates the home-ownership gap between native and immigrant households in more detail. Specifically, the chapter examines the relative importance of the determinants of home-ownership and differences in the home-ownership probability between different groups of migrants and natives, using home-ownership as a binary dependent variable in a cross-sectional analysis. Moreover, empirical evidence on the assimilation process of immigrant households in Germany is generated by investigating the effect of years of residence on home- ownership, applying the empirical framework of Myers and Lee (1996). Finally, in order to gain an understanding of disparities in the housing quality between native and immigrant home-owners, Chapter 6 analyzes differences in the housing value and the imputed rent level. The estimates of a binary Probit model reveal that immigrant households are less likely to own their primary residence than comparable native households, while differences in the home-ownership probability between immigrant households from different regions of origin are not significant. The results exhibit that the probability of immigrant households to own a house or apartment is lower than the corresponding probability of comparable German households. In addition, the estimates of the cohort model developed by Myers and Lee (1996) suggest that an assimilation process in home-ownership between native and immigrant households does not take place. Moreover, differences in the housing quality become insignificant after controlling for socioeconomic characteristics and contextual factors of native and immigrant households separately. Overall, the empirical findings in this thesis indicate that the German welfare system may face additional unforeseen burdens in the coming years. In the next two decades, nearly two million immigrant workers will reach retirement age. This group of immigrants appears to have a substantial lower savings rate than natives and hence it must be feared that they have not accumulated sufficient savings for the time of their retirement. This in turn may result in an increased utilization of the German social

22 1. Introduction and Overview 17 security system by immigrants. The empirical results further reveal sizeable differences in the savings behavior between natives and immigrants in Germany, pointing to substantial disparity in the economic well-being of the two groups. International comparisons exhibit that the substantial cross-national disparity in the economic well-being of immigrant and native families is largely consistent with the selection policies used to shape the skills and settlement intentions of the immigration population. While immigrants in traditional immigration countries (such as Australia or the United States) are generally both permanent and relatively skilled, a sizeable part of the immigrant population in Germany is unskilled and notionally temporary. As a consequence, a long-run economic integration of immigrants to Germany has so far not taken place.

23 2. THE SAVINGS BEHAVIOR OF TEMPORARY AND PERMANENT MIGRANTS IN GERMANY Abstract. This chapter examines the relative savings position of migrant households in West Germany, paying particular attention to differences between temporary and permanent migrants. Our findings reveal significant differences in the savings rates between German natives and immigrants. These differences diminish for temporary migrants, if their remittances are taken into account. The results of a decomposition analysis indicate that the major part of the differences in the savings rate between Germans and permanent migrants as well as between temporary and permanent migrants can be attributed to differences in observable characteristics. Joint work with Thomas Bauer. A preliminary version of this chapter has been circulated as RWI Discussion Paper No. 29, IZA Discussion Paper No and CEPR Discussion Paper No

24 2. The Savings Behavior of Temporary and Permanent Migrants Introduction Due to the growing number of immigrants worldwide, the economic situation of the foreign-born population and the economic and social integration of immigrant minorities into the host-countries s society have become increasingly important. Following the seminal contribution by Chiswick (1978), the economic literature concentrates predominantly on earnings and employment status as indicators of economic integration (Borjas, 1994; Zimmermann, 2005). Despite its importance, only a few contributions rely on more long-run indicators of the overall economic wellbeing, such as wealth or savings rates (Cobb-Clark and Hildebrand, 2006a; Amuedo- Dorantes and Pozo, 2002). Such long-run indicators of economic integration, however, may provide additional insights to the integration process of migrants, because they do not only measure current integration but also allow to draw inferences about the future economic situation of immigrant minorities. Private savings are a good example of such a long-run indicator of economic integration. As a result of the demographic change induced by increasing life expectancy and declining birth rates, private savings have become increasingly relevant in many developed countries with a pay-as-you-go pension system to supplement public pensions after retirement. Germany, the major immigration country in the European Union, represents an excellent example of the importance of private savings for the future economic situation of immigrants. In the 1960s and 1970s, a large number of temporary guest workers mainly labor migrants from Southern Europe were encouraged to migrate to Germany. Many of them, however, decided to stay in Germany permanently (Bauer et al., 2005a). The savings propensity and the resulting wealth position of this group of immigrants may become an important factor for the German pension system, because about 1.5 million immigrants in Germany will reach retirement age within the next 15 years. Several arguments suggest the existence of savings disparities between immigrants and the native-born population. Firstly, different preferences for savings may be caused by the original migration motive of immigrants, in particular whether migration is planned to be permanent or temporarily. Secondly, immigrants may engage in precautionary saving by remitting parts of their income to their home countries. These transfers have to be considered while investigating preferences for savings of foreign households. Thirdly, differences in the savings patterns and wealth posi-

25 2. The Savings Behavior of Temporary and Permanent Migrants 20 tion may be caused by differences in the earnings potential between natives and immigrants resulting from differences in socioeconomic characteristics such as, for example, differences in the cultural and economic background or skill differences. The savings gap between natives and immigrants may further be the result of institutions such as regulations concerning the access to social benefits. Finally, the family may play a different role with respect to support in old age for immigrants if compared to natives. If, for example, immigrants can expect more credibly that their descendants will care for them when they are old, they may use more of their income to invest in the earnings potential of their children rather than accumulating savings for the period after retirement. This chapter aims at providing a comprehensive descriptive analysis of the savings pattern of immigrants relative to natives using German data. We pay special attention to the relative importance of remittances and control for differences between permanent and temporary migrants. Specifically, the following research questions will be addressed in this chapter: Are there differences in the savings rate between natives, temporary migrants and permanent migrants? Which part of the savings differential can be attributed to differences in the characteristics of immigrants and natives and which part is due to different preferences for savings? And, finally, are interest rate differentials between the host and the home country or a different role of the family able to contribute to the explanation of a different savings pattern of immigrants and natives? The chapter contributes to the existing migration literature in several respects. First, we provide evidence on the economic integration of immigrants in Germany using savings rates rather than earnings and employment status and analyze whether differences in the savings rate between immigrants and natives are due to different socioeconomic characteristics or differences in individual preferences for savings. In addition, we contribute to the understanding of the effects of the migration motive on economic assimilation. Finally, we provide further evidence on the importance and the use of remittances. Our findings reveal significant differences in the savings rate between Germans and immigrants. However, these differences get smaller when taking remittances of temporary migrants into account. Decomposing the savings rate differential, we find that more than half of the difference between native Germans and permanent mi-

26 2. The Savings Behavior of Temporary and Permanent Migrants 21 grants as well as between temporary and permanent migrants can be explained by differences in socioeconomic characteristics. We further investigate whether the unexplained part of the savings differential is correlated with interest rate differentials between Germany and the countries of origin. Our results indeed indicate that the unexplained part of the savings differential between immigrants and natives is relatively large if interest rates in the countries of origin are higher than in Germany and remittances are not considered. If we treat remittances as savings, however, we find that the coefficient of correlation between the unexplained parts of the savings differential and the interest rate differential becomes insignificant. Finally, analyzing differences in the probability of receiving transfers from relatives provides no indication that immigrant households save less because they are more likely to receive transfers from relatives upon retirement than comparable native households. The chapter proceeds as follows. Section 2.2 gives a short survey of the existing literature on the savings behavior of migrants. Section 2.3 describes the data used for the empirical analysis and explains our estimation strategy. In this section we further develop a decomposition method for Tobit models, which follows the method proposed by Blinder (1973) and Oaxaca (1973) for linear regression models. This decomposition method allows us to isolate the part of the savings differential between immigrants and natives that can be explained by differences in socioeconomic characteristics from the part attributable to differences in the coefficients of these characteristics. The estimation results are presented in Section 2.4. Section 2.5 concludes. 2.2 The Savings Differential between Natives and Immigrants From a theoretical point of view, differences in the saving patterns between immigrants and natives may be caused by a variety of factors. Firstly, different savings behavior may be caused by the migration motive. Galor and Stark (1990) argue, for example, that the remigration probability of immigrants in the host country is higher than the migration probability of comparable natives. They use an overlapping-generations model to show that the higher probability of remigration increases labor supply in the host country and consequently the saving propensity of immigrants. Djajic and Milbourne (1988) and Djajic (1989) show, that temporary migrants save for later consumption in the home country while staying abroad if commodity prices are higher in the host than in the home country, i.e. temporary

27 2. The Savings Behavior of Temporary and Permanent Migrants 22 migrants have higher savings rates than natives and permanent migrants. These arguments suggest, that it may be important to distinguish between temporary and permanent migrants when investigating the savings propensity of immigrants relative to natives, with temporary migrants saving more than permanent migrants and natives. Following the literature on migration that occurs for risk-diversification within families (Stark, 1991), Dustmann (1997) develops a model in which immigrants duration abroad and savings are jointly determined. He demonstrates that immigrants may accumulate more precautionary savings than comparable natives if they face greater income risks on the labor market of the host country. Dustmann (1997) also argues that the lifelong income risk of immigrants may be smaller than that of natives, if immigrants are able to diversify labor market risks across countries. In this case, precautionary savings of immigrants may be lower than those of natives. Supporting this hypothesis, Amuedo-Dorantes and Pozo (2002) find lower savings rates for immigrants than for natives. They argue, however, that the apparent lower precautionary savings of immigrants may be caused by the fact that immigrants engage in precautionary saving by remitting parts of their income to their home countries. To explore this issue further, Amuedo-Dorantes and Pozo (2006) pay particular attention to the determinants of remittances. Using data on Mexican immigrants in the United States, they find that a higher income risk leads to increased remittances of immigrants. Using data for Germany, Merkle and Zimmermann (1992) find that remigration plans represent an important determinant of remittances. However, they do not find a significant effect of remigration plans on savings. Based on these results, they conclude that temporary migrants hold savings mainly in their home country. Savings disparities may also be caused by the fact that immigrants represent a highly selected group of people. Because of self-selection and the immigration policies of the receiving countries, immigrants are neither representative for the population in the home nor for the population in the host country. Therefore, savings disparities may exist because of differences in the socioeconomic and cultural background. Skill differences, for example, may be responsible for differences in the economic performance of immigrants and natives (Chiswick, 1978; Borjas, 1987), and hence savings rates.