The value of foreign language skills in the German labor market

Sabrina Hahm, Michele Gazzola

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Abstract

This article explores the relationship between foreign language skills and individuals’ labor income in Germany, focusing on the English language. Using the 2012 and 2016 waves of the German Socio-Economic Panel's Innovation Sample (SOEP-IS), we find that native speakers of German with English language skills earn a wage premium of 13 percent, on average. Incremental improvements in the level of skills, e.g., from basic to independent user, increase wages by 11 percent, on average. We address endogeneity issues by using novel data that combine comprehensive information about individuals’ characteristics with fine-grained self-assessments of language skills based on descriptors derived from the Common European Framework of Reference for Languages (CEFR). Any remaining sources of endogeneity in the level of language proficiency are addressed by an instrumental variable approach that exploits exogenous variation in individuals’ exposure to foreign language acquisition in school. We also show that wage differentials cannot be explained by the value of foreign language skills as a general ability signal, but they are driven by the productive value of such skills. Finally, by examining language skills instead of the use of such skills in the workplace, we identify individual returns to foreign languages for the general population. As education policy is the main determinant of English language acquisition (not only in Germany), this information is highly relevant for policy-makers.

Original languageEnglish
Article number102150
Number of pages29
JournalLabour Economics
Volume76
Early online date25 Mar 2022
DOIs
Publication statusPublished (in print/issue) - 1 Jun 2022

Bibliographical note

Part of this project benefited from the financial support of the European Union’s Seventh Framework Program (Project “Mobility and Inclusion in a Multilingual Europe”, MIME—Grant Agreement 613344), the Spanish Ministry of Economy and Competitiveness (ITL project - CSO2015-64247-P).

Funding Information:
We gratefully acknowledge helpful comments and suggestions by two anonymous referees, as well as by Jochen Kluve, François Vaillancourt, Gilles Grenier, Bengt-Arne Wickström, Alexandra Fedorets, Meike Weltin, Torsten Templin, Nannette Swed, Michael Kvasnicka, Ingrid Gogolin, Sara McMonagle, Sabine Fiedler, Wolfgang Mackiewicz, Elena Carrara, Jürgen van Buer and Hans-Jürgen Krumm. The authors bear exclusive responsibility for any mistake. We are very grateful that the German Institute for Economic Research (DIW Berlin) has provided us with data and technical support. Furthermore, we gratefully acknowledge use of the Stata/LaTex framework provided by von Gaudecker (2019). Part of this project benefited from the financial support of the European Unions Seventh Framework Program (Project ”Mobility and Inclusion in a Multilingual Europe”, MIME Grant Agreement 613344), and the Spanish Ministry of Economy and Competitiveness (ITL project - CSO2015-64247-P).

Funding Information:
We gratefully acknowledge helpful comments and suggestions by two anonymous referees, as well as by Jochen Kluve, François Vaillancourt, Gilles Grenier, Bengt-Arne Wickström, Alexandra Fedorets, Meike Weltin, Torsten Templin, Nannette Swed, Michael Kvasnicka, Ingrid Gogolin, Sara McMonagle, Sabine Fiedler, Wolfgang Mackiewicz, Elena Carrara, Jürgen van Buer and Hans-Jürgen Krumm. The authors bear exclusive responsibility for any mistake. We are very grateful that the German Institute for Economic Research (DIW Berlin) has provided us with data and technical support. Furthermore, we gratefully acknowledge use of the Stata/LaTex framework provided by von Gaudecker (2019) . Part of this project benefited from the financial support of the European Unions Seventh Framework Program (Project ”Mobility and Inclusion in a Multilingual Europe”, MIME Grant Agreement 613344), and the Spanish Ministry of Economy and Competitiveness (ITL project - CSO2015-64247-P).

Publisher Copyright:
© 2022 The Authors

Keywords

  • Language education policy
  • Returns to foreign language skills
  • Human capital
  • Wage differentials
  • Instrumental variables

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