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 also consider under which conditions social discrimination arises in equilibrium as the outcomes of electoral competition via the implementation of symbolic policies, such as burqa ban and minaret ban, which raises the saliency of certain social traits. We further highlight that the implementation of symbolic policies is always associated with less redistribution and lower taxation. We discuss several policy recommendations to limit the possibility of social discrimination arising