More Educated but Underpaid: Immigrants and the Benefits of Host-Country Education

Immigrants in Portugal have, on average, higher levels of formal education than natives, yet they continue to face persistent wage penalties and higher rates of over-education. This raises important questions about the transferability of human capital acquired abroad and the role of host-country education in facilitating immigrants’ economic integration. Using microdata from the Portuguese Labour Force Survey, we study how schooling obtained in Portugal affects immigrants’ labor market outcomes, employing a fuzzy regression discontinuity design (RDD).
The results indicate that host-country schooling yields substantial economic returns. Completing at least one additional year of education in Portugal increases hourly wages by up to 14%, significantly improving immigrants’ labor market positioning and reducing the wage gap with comparable natives. These findings highlight that formal education obtained in the destination country plays a key role in future labor market outcomes.
To strengthen causal inference, we exploit Portugal’s compulsory schooling reform, which extended mandatory education from six to nine years for individuals born after 1980, creating a discrete increase in schooling across cohorts. This setting enables a difference-in-differences design that compares early-arriving immigrants, who were young enough to be affected by the reform and received part of their education in Portugal, with late-arriving immigrants, who completed schooling abroad. This comparison effectively isolates the causal impact of host-country schooling by netting out confounding factors such as language proficiency, local networks, and adaptation advantages that early arrivals may possess. To address remaining endogeneity from self-selection into education, the analysis employs an instrumental variables strategy, using reform exposure as an exogenous instrument for schooling. Together, the DiD and IV estimates reveal that immigrants affected by the reform experienced, on average, a 20% increase in hourly wages, highlighting that expanding compulsory education can generate substantial and persistent labor market benefits even among foreign-born populations.
These results highlight the importance of earlier arrival and integration into the host-country schooling system, such as family reunification and access to compulsory education for immigrant children. Such policies not only raise human capital accumulation but also accelerate wage convergence and reduce structural inequalities in the labor market, strengthening the overall effectiveness of integration policies.