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 can shape hiring decisions. Identity is malleable and a majority group member can become socially associated with the minority group. Fear of identity contagion can sustain a fully segregated labor market in which workers with minority trait experience higher unemployment and minority-owned firms are less productive than their majority counterparts. When the minority group is poorly integrated economically (consisting of more workers than employers), workers with majority trait obtain better labor market outcomes in an equilibrium with discrimination than without. Office-motivated candidates therefore have electoral incentives to propose symbolic policies targeting the minority to trigger social discrimination in the labor market. As majority-trait workers are better off with social discrimination and the economy shrinks, the implementation of symbolic policies is associated with both lower taxes and less redistribution.