DP17291 A Political Economy of Social Discrimination
This paper studies the causes and consequences of social discrimination. We consider a labor market in which payoff-irrelevant identity traits serve as a focal point in hiring decisions. We show that social expectations about behavior can sustain a fully segregated labor markets in which workers with minority traits experience higher unemployment, longer unemployment spells, and lower wages and minority-owned firms are less productive than their majority counterparts. We study how discriminatory norms in the labor market can arise as a result of electoral competition. We uncover conditions under which majority-trait workers favour a discriminatory equilibrium in the labor market and politicians have an incentive to respond to those workers' demand. We further highlight that the implementation of symbolic policies is always associated with less redistribution and lower taxation. We compare social discrimination with other forms of discrimination and discuss several possible remedies against social discrimination.
