Racial Discrimination in the U.S. Labor Market: Employment and Wage Differentials by Skill

By Daniel Borowczyk-Martins, Jake Bradley and Linas Tarasonis

http://d.repec.org/n?u=RePEc:aim:wpaimx:1413&r=dge

In the US labor market the average black worker is exposed to a lower employment rate and earns a lower wage compared to his white counterpart. Lang and Lehmann (2012) argue that these mean differences mask substantial heterogeneity along the distribution of workers’ skill. In particular, they argue that black-white wage and employment gaps are smaller for high-skill workers. In this paper we show that a model of employer taste-based discrimination in a labor market characterized by search frictions and skill complementarities in production can replicate these regularities. We estimate the model with US data using methods of indirect inference. Our quantitative results portray the degree of employer prejudice in the US labor market as being strong and widespread, and provide evidence of an important skill gap between black and white workers. We use the model to undertake a structural decomposition and conclude that discrimination resulting from employer prejudice is quantitatively more important than skill differences to explain wage and employment gaps. In the final section of the paper we conduct a number of counterfactual experiments to assess the effectiveness of different policy approaches aimed at reducing racial differences in labor market outcomes.

I selected this paper this week because it is a rather unusual application of dynamic general equilibrium, and it highlights the potential of using standard macrotheory to address non-macro questions. Indeed, my understanding of the discrimination literature is that its empirical applications are largely devoid of theory, or at least these are not structiral estimations. Neither is this paper, but it takes theory very seriously and asks, in a very macro manner, how far theory can take us in explaining what we observe, and then uses the theory to determine the extend of discimination. The approach (and the results) should encourage others to follow up on this research.

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One Response to Racial Discrimination in the U.S. Labor Market: Employment and Wage Differentials by Skill

  1. Jake says:

    Thanks Christian for including our paper in your blog, it is much appreciated.

    We agree with you that this is a very promising avenue of research. While I agree that our largest contribution is probably a theoretical one, this paper also takes our structural estimates seriously. It is important to quantify the problem to which we are addressing, namely prejudice and its consequences in the labour market. It also allows us to explore policy channels that can help to readdress the balance.

    I think what helps this applied literature in general is the increasing availability in matched worker-firm data. I think taking this class of model to better data could prove to be very fruitful.

    Jake Bradley

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