Occupational segregation in a Roy model with composition preferences

TL;DR

This paper develops a model combining the Roy model of labor market sorting with sector composition preferences, revealing how these preferences amplify segregation and lead to tipping points influenced by policy nudges.

Contribution

It introduces a novel model integrating comparative advantage with composition preferences, analyzing their combined effect on occupational segregation and equilibrium shifts.

Findings

Composition preferences amplify occupational segregation.

Small policy nudges can cause large shifts in sector composition.

Tipping points depend on the balance between pecuniary and composition preferences.

Abstract

We propose a model of labor market sector self-selection that combines comparative advantage, as in the Roy model, and sector composition preference. Two groups choose between two sectors based on heterogeneous potential incomes and group compositions in each sector. Potential incomes incorporate group specific human capital accumulation and wage discrimination. Composition preferences are interpreted as reflecting group specific amenity preferences as well as homophily and aversion to minority status. We show that occupational segregation is amplified by the composition preferences and we highlight a resulting tension between redistribution and diversity. The model also exhibits tipping from extreme compositions to more balanced ones. Tipping occurs when a small nudge, associated with affirmative action, pushes the system to a very different equilibrium, and when the set of equilibria changes abruptly when a parameter governing the relative importance of pecuniary and composition preferences crosses a threshold.