Measuring the welfare costs of racial discrimination in the labor market

Abstract

We find that the conditional wage-gap for non-whites is negatively related to gross domestic product per worker across the US. To explain this, we develop a model linking unequal access to employment with the wage gap, labor misallocation, and income loss. The presence of underprivileged workers allows inefficient firms to co-exist with efficient ones and leads to skill misallocation, higher unemployment and lower output. Calibrating the model to match the US, we find a fall in market-based racial discrimination renders inefficient firms non-profitable, causing reallocation of labor and a positive effect on income as high as 4 percent when discrimination is eliminated.