High Unemployment in Germany: Why do Foreigners Suffer Most?

In Germany, immigrant unemployment is not only higher than native unemployment; it also reacts more to changes in the situation on the labor market. Decomposing the gap between native and immigrant unemployment into a baseline and a labor-market situation component, I find that the unemployment rate of immigrants would lie at 5.6 percentage points for zero native unemployment (the baseline component of the gap). An increase in overall unemployment by 1 percentage point leads to a 0.7 percentage points higher increase in immigrant unemployment than in native unemployment (the situation component). 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 endowments with classical human capital (educational degrees and experience) between immigrants and natives. Also controlling for country-specific human capital, particularly language skills, the situation component 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 can possibly fully explain the difference between native and immigrant unemployment in Germany.