High Unemployment in Germany: Why do Foreigners Suffer Most?

Wido Geis
ifo Institute for Economic Research, Germany

The unemployment rate of immigrants in Germany is not only higher than the rate of natives but also reacts more to changes in the labor-market situation. Decomposing the unemployment rate into a baseline and a labor-market situation component I find that for zero native unemployment immigrant unemployment would lie at 5.6 percentage points (the baseline effect). An increase in overall unemployment by 1 percentage point leads to an 0.7 percentage points higher increase immigrant unemployment than in native unemployment (the situation effect). The large part of this difference, about 3/4 of the baseline and 4/5 of the situation component, can be explained by differences in the endowment with classical human capital (educational degrees and experience). Also controlling for language skills, country specific human capital, the situation effect becomes insignificant and the baseline effect again decreases by 1/2. Adding controls for social networks the baseline effect also becomes insignificant. Thus, human capital and social networks potentially fully explain the difference between native and immigrant unemployment.

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