Macroeconomics of Racial Disparities: Discrimination, Labor Market, and Wealth

TL;DR

This paper models how racial discrimination in hiring sustains economic disparities between black and white workers, quantifying its impact on unemployment, wages, and wealth gaps, and showing that eliminating prejudice improves overall welfare.

Contribution

It introduces a labor search-and-matching model with prejudiced firms to quantify discrimination's role in economic disparities and assess policy impacts.

Findings

Discriminatory practices account for 57% of the racial unemployment gap.

Discrimination explains 48% of the wage gap and 16% of the wealth gap.

Removing prejudiced firms reduces disparities and enhances welfare.

Abstract

This paper examines the impact of racial discrimination in hiring on employment, wages, and wealth disparities between black and white workers. Using a labor search-and-matching model with racially prejudiced and non-prejudiced firms, we show that labor market frictions sustain discriminatory practices as an equilibrium outcome. These practices account for 57% of the racial unemployment gap, 48% of the average wage gap, and 16% of the median wealth gap. Discriminatory hiring also increases unemployment and wage volatility for black workers, increasing their labor market risks over the business cycle. Eliminating prejudiced firms reduces these disparities and improves the welfare of black workers as well as the overall economic welfare.