Hansen and Lofstrom 85
differences over time, in socioeconomic and geographic characteristics may also partly explain the pattern. To accurately analyze assimilation rates, an empirical
model needs to be estimated. We now turn our attention to such a model.
VI. Empirical Specification and Results
To analyze welfare utilization we need insight into why households participate in social assistance. Clearly, the labor market conditions household mem-
bers face will affect the probability that the household will end up on welfare. In other words, the factors we believe will affect employment probabilities also need
to be incorporated into our welfare utilization models. It is also quite plausible that immigrants and natives do not face the same labor market conditions. For example,
human capital obtained abroad may be viewed differently than human capital ac- quired in the new country. Indication of this was found in Betts and Lofstrom 2000
for the United States. Another possibility is discrimination against immigrants. It is therefore important to allow the employment factors to affect welfare participation
probabilities differently for immigrants and natives. Individuals’ preferences and tastes for leisure will also affect the probability of being on welfare through differ-
ences in the reservation wages. The so-called stigma effect of receiving welfare payments also depends on individuals’ preferences. The individual differences in
reservation wages and the potential stigma of being on welfare are inherently un- observable but can be controlled for by using estimation methods that account for
differences across individuals, including random or fixed effects.
A. Do Differences in Observable Characteristics Explain Differences in Welfare Participation?
In the introduction we asked whether the overrepresentation of immigrants among welfare-recipient households is due to differences in observable characteristics, to
behavioral differences, or to differences in labor market conditions. To answer this, we formulate random-effects probit models of welfare participation.
To be specific, the estimated models can be described as follows. Let 1
y
it
⫽ X
it
β ⫹ ε
it
∀ i ⫽ 1,2, . . . , n and t ⫽ 1,2, . . . , T
i
where 2
ε
it
⫽ µ
i
⫹ v
it
y
it
is a latent variable representing preferences for welfare utilization of household
i at time t. X is a vector of socioeconomic and geographic characteristics, including age, educational attainment, marital status, and the number of children. In addition,
it contains information about the municipal social assistance norm and the county unemployment rate. The unobserved household specific effect, assumed to be time
invariant, is represented by
µ
i
and v
it
and is a white-noise error term. We assume that these unobserved stochastic terms have the following properties:
3 µ
i
, v
it
⬃ N0, Ω
86 The Journal of Human Resources
with 4
Ω ⫽
冤
σ
2 µ
1
冥
This implies that 5
Var ε
it
⫽ σ
2 µ
⫹ 1 and
6 Corr
ε
it
, ε
is
⫽ ρ ⫽ σ
2 µ
σ
2 µ
⫹ 1 We do not observe y, but we assume that we can observe the sign of it, and based
on that we can formulate the following decision rule: 7
y
it
⫽ 1 if y
it
⬎ 0, and 0 otherwise where y
it
⫽ 1 represents utilization of SA. The set of control variables is very similar to what has been used in previous
studies for other countries. The vector X also includes three not mutually exclusive nativity indicator variables. The following three immigrant dummies are defined:
Immigrant equal to one for all immigrants, Nordic Immigrant equal to one for all immigrants from the Nordic countries and Refugee Immigrant equal to one for all
immigrants from the previously defined refugee countries. This implies that the coefficient on the Immigrant dummy captures differences between natives and all
immigrants while the coefficient on the Refugee Immigrant dummy captures differ- ences between nonrefugee immigrants and immigrants from refugee countries. Given
this definition of the nativity variables, the disparity between immigrants from refu- gee countries and natives is the sum of the two estimated coefficients for immigrants
and refugees. Similarly, the difference in probability of welfare participation between Nordic immigrants and natives is the sum of the Immigrant and Nordic Immigrant
estimated coefficients. If higher welfare-participation rates among immigrants are simply due to differences in observable characteristics between natives and immi-
grants, the estimated relevant coefficients on the nativity variables should not be significantly different from zero when these controls are included in the model. The
results and marginal effects calculated at the mean of the observables are presented in Table 3.
All immigrants appear to be more likely to participate in the social assistance program even after observable characteristics are controlled for. Model 1 shows the
differences in the probability of receiving welfare between the three immigrant cate- gories and natives, adjusting for the national trend over the period. The overall dif-
ference between nonrefugee immigrants and natives is 6.9 percentage points. The probability that a Nordic immigrant household participates in the social assistance
program appears to be slightly less than a nonrefugee immigrant’s household. A refugee household is substantially more likely to be on welfare than a native house-
hold; the difference is about 18.6 percentage points.
The results for Model 2 indicate that differences in observable characteristics ex-
Hansen and Lofstrom 87
plain very little of the differences in welfare participation between natives and immi- grants. Immigrants from nonrefugee countries are about 6.6 percentage points more
likely to receive welfare compared to statistically similar natives. Only 5 percent of the total observed difference is due to differences in observable characteristics. The
estimated difference for a refugee household drops by 1.6 percentage points when the observable socioeconomic variables are included in the model. A very small
proportion, slightly less than 9 percent, of the higher observed-participation rates of refugees can be explained by differences in age, education, household composition,
and geographic location.
Table 2 shows that it is important to allow for differences in welfare utilization between arrival cohorts. To ensure that changes in the composition of immigrants
over the period do not explain the large differences even after observables have been controlled for, we reestimated Model 2 in Table 3 with arrival cohort dummies. The
results are shown in Table 3 as Model 3. The differences between immigrants and natives remain for all arrival cohorts. It is quite clear that differences in welfare
participation between immigrants and natives are not due to differences in socioeco- nomic characteristics.
Our findings that differences in observable characteristics between immigrants and natives do not explain the higher welfare-participation rates of immigrants differ
from the findings for the United States, Canada, Australia, and Germany. The analy- sis performed here does not tell us whether the differences between immigrants and
natives are due to behavioral differences or differences in the labor market opportuni- ties between the two groups.
Two possible reasons may explain the differences in findings across countries. First, the Swedish labor market may view immigrants and their observable character-
istics differently from the previously mentioned countries’ labor markets. Another possible reason is that immigrants do not randomly choose the destination country.
Instead, they may self-select according to preferences, relative expected earnings, and the generosity of the welfare system in the new host country. If so, immigrants
may select Sweden partially due to its fairly generous welfare system. It should be noted that our analysis does not allow us to determine the extent to which each
possible reason contributes to the discrepancy in findings across countries.
B. Assimilation Into or Out of Welfare?
