ARCHIVED – Social Capital and Wages - Outcome of Recent Immigrants to Canada

1. Introduction

It is now well established that social capital[Note 1] is a resource that resides in interpersonal networks and that workers draw upon it to access employment and better job opportunities (e.g. Granovetter 1995; Lin 2001). Returns to social capital in the labour market have been explored increasingly over the last decade (e.g. Lin 1999; Staiger 1990; Calvó-Armengol and Jackson 2003). Despite an important theoretical literature arguing that using contacts or networks increases wages and occupational status (e.g. Granovetter 1995; Lin 2001), the empirical results on the effects of social capital on labour market outcomes vary with the contexts of the studies. The disparity of measurements of social capital and the unavailability of relevant data leave the empirical question open.

When the question on the role of social capital in the labour market is extended to the immigrant population, new issues arise. Contrary to the quite consistent findings that social capital enhances employment outcomes for non-immigrants, some existing studies on social capital and immigrant economic outcomes indicate that this positive relationship does not necessarily hold for them (e.g. Potocky-Tripodi 2004; Xue 2007). Meanwhile, some other studies support the argument that social capital is important for the economic integration of immigrants, especially for those disadvantaged in the labour market (e.g. with less human capital) (e.g. Livingston 2006). Mainly because of data limitations, most studies focus on specific immigrant groups, ignoring the unobserved individual heterogeneity. In addition, the potential endogeneity of social capital with respect to individual unobserved heterogeneity in innate ability makes this problem particularly difficult to study.

The primary objective of this paper is to identify the effects of endogenous social capital on wages. This paper features several ways of dealing with the aforementioned difficulties in the literature. First, drawing on a recent dataset – The Longitudinal Survey of Immigrants to Canada (LSIC), because of its longitudinal nature it is possible to take into account unobserved individual heterogeneity by using panel data models. In this paper, different panel models are employed to estimate social capital effects: random effects model, fixed-effects model, Hausman-Taylor (HT) model and instrumental variables (IV) model for panel data. Second, the endogeneity of social capital motivates the study to examine the return to social capital treating social capital indicators as endogenous variables. In the paper, instrumental variables (IV) methods and a generalized method of moments (GMM) estimator proposed by Hausman and Taylor (1981) are used to take into account endogeneity. The Hausman-Taylor estimator is shown to be efficient and consistent and is favoured over other panel estimators including IV ones. The results show that endogenous social capital variables have significant effects on immigrant wages during the initial years in Canada. Unlike the previous literature (e.g. Granovetter 1973), strong ties such as family network and friends dominate weak ties, including organizations, in getting immigrants better jobs in terms of higher wages in the first years, especially for those disadvantaged in human capital. The results confirm the expected (imperfect) substitution effects of social capital on human capital. Meanwhile, the ethnic diversity of the workplace network is the most influential factor within social capital that affects wages for both male and female immigrants.

The outline of the paper is as follows. In the following section, a brief review of the literature is provided in order to situate the current paper in. In Section 3, a description of the data and methodology are presented. Then, the theoretical and empirical frameworks follow in Section 4, after which a brief descriptive analysis is provided in Section 5. Section 6 presents the estimation results, with a focus on differences among various panel data estimators. The paper ends with conclusions and a discussion in Section 7.

Notes

1 The definition and measurement of social capital was discussed in detail in Xue (2007) “Social Capital and Employment Entry of Recent Immigrants to Canada”.

 

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