How much of the immigrant pay penalty is explained by qualifications?
AUSynth · Combined: Victoria, Queensland · May 2026
This is a combined analysis. Figures are pooled across Victoria, Queensland.
Overview
This analysis decomposes the income gap between Australian-born and
overseas-born workers in Combined: Victoria, Queensland. We ask: how much of the
gap (if any) is explained by differences in education, and how much
remains unexplained?
Education is the mediator we're examining. The question is whether
educational attainment is the bridge between birthplace and income,
or whether something else is going on.
Exposure (X)
Place of birth
Australian-born (Oceania) vs Overseas-born
→
Mediator (M)
Highest education
Postgraduate, Bachelor, Diploma/Certificate, Year 10+, Below Year 10 / Not stated
→
Outcome (Y)
Income
Earning above $800-$999 ($41,600-$51,999) per week
What is mediation analysis? Mediation analysis separates an effect into two paths: the indirect effect (operating through the mediator) and the direct effect (everything else). Imagine you discover that students from a particular school earn less after graduation. Why? Two paths: INDIRECT: the school offers fewer advanced subjects, so students get lower qualifications, which leads to lower pay. The school's effect on income operates through education. DIRECT: employers hold biases against the school, so even graduates with the same qualifications earn less. The school's effect on income remains after accounting for education.
How To Read The Effects
Total Effect
What it is: The overall difference in outcome between the two groups
How to read it: A positive value means the comparison group is more likely to achieve the outcome; negative means less likely. Measured in percentage points (pp)
Indirect Effect (ACME)
What it is: The part of the total effect that operates through the mediator
How to read it: If large relative to the total, the mediator is a major pathway. If small, the mediator is not the main story
Direct Effect (ADE)
What it is: Everything that remains after accounting for the mediator
How to read it: A large direct effect means the mediator doesn't explain the relationship; other mechanisms are at work
Proportion Mediated
What it is: What share of the total effect flows through the mediator
How to read it: Higher means the mediator explains more. Shown as n/a when effects pull in opposite directions
Results
Total Effect
4.89pp
Bootstrap: [4.83, 4.96]pp
Indirect Effect (through mediator)
9.32pp
Bootstrap: [9.28, 9.35]pp
Direct Effect
-4.42pp
Bootstrap: [-4.49, -4.36]pp
Proportion mediated: n/a
Effects are in opposite directions. Proportion mediated is not meaningful in this case. See guidance below.
Comparison: Overseas-born vs Australian-born (Oceania) (reference). Outcome: Earning above $800-$999 ($41,600-$51,999) per week.
Income threshold: $800-$999 ($41,600-$51,999) (national median bracket).
Based on 10,983,276 observations.
What Your Data Shows
Overseas-born workers in this area are 4.9 percentage points MORE likely to earn above the median income than Australian-born workers -- but this headline hides two opposing realities.
Migrants to Australia are more qualified, on average, than people born here -- Australia's skilled migration system selects for it. Because of their qualifications alone, overseas-born workers SHOULD be earning more by 9.3 percentage points.
But once you compare like with like -- overseas-born and Australian-born workers with the SAME level of education -- overseas-born workers earn LESS by 4.4 percentage points. Their qualifications aren't being rewarded equally.
What looks like a small advantage for migrants is actually two stronger forces partially cancelling each other out. Migrants are over-qualified for the jobs they hold, or their overseas qualifications and experience aren't valued as much as domestic ones.
Where the gap actually sits: not in migrant qualifications (those are strong), but in how foreign credentials, overseas work experience, and professional networks are valued by Australian employers. Patterns like this typically shift through skills recognition, credential bridging, and changes in employer practice -- not through migrant education, which is already the strongest part of the picture.
Why opposite-direction effects matter
Imagine students from one school earn less than students from other schools after graduation. Two pathways might explain this:
The school may not offer advanced subjects, so students end up with lower qualifications. Less qualified students earn less. (the indirect path)
Even with the same qualifications, employers may pay these students less due to perceived school reputation. (the direct path)
If the school happened to provide BETTER preparation (positive indirect) while employers held biases against graduates (negative direct), the two would partially cancel. The total visible pay gap could look small, but it would mask two strong opposing forces.
Your data above shows this pattern. The small visible gap masks substantial underlying inequality.