Beginning with Chiswick (1978), practically all studies of the economic progress of immigrants use the human capital model as a point of departure. The typical discussion argues that immigrants have a relative wage disadvantage at the time of entry because immigrants lack the U.S.-specific skills that are rewarded in the labor market. Moreover, the costs of acquiring human capital in the post-migration period (such as becoming proficient in English) are mainly incurred as foregone earnings, so that these initial human capital investments further depress entry wages for immigrants. Over time, as the immigrants reduce their human capital acquisitions and collect the returns on earlier investments, they experience faster wage growth than natives.
This generic restatement of the human capital model seems to suggest that one should expect a negative correlation between entry wages and subsequent wage growth: faster wage growth results only if immigrants are willing to give up some earnings at the time of entry. This inference, however, is incorrect because it does not account for the dispersion in the human capital stock that exists in the immigrant population at the time of entry. This heterogeneity could easily lead to a positive correlation between entry wages and wage growth. A simple two-period model of the human capital accumulation process captures the basic idea.
Let К measure the number of efficiency units that an immigrant has acquired in the source country. Because human capital is not perfectly transferable across countries, a fraction 8 of these efficiency units evaporate when the immigrant enters the United States. The number of effective efficiency units that the immigrant can rent out in the U.S. labor market is then given by E = (1 – 5) K. Without loss of generality, suppose that the market-determined rental rate for an efficiency unit is one dollar.