Labor Market Discrimination and the Macroeconomy

Using Integrated Household Survey data from Georgia, we measure the observable and discriminatory ethnic wage gap, among male and female workers, and the gender wage gap, among Georgians and non-Georgians. The gender wage discrimination is larger than the ethnic wage discrimination. In the second estimation stage, these wage discrimination estimates are used in a general-to-specific vector autoregression framework to test for the Granger causality between discrimination and growth. A general, negative, bidirectional Granger causality is found between these two variables: in the long-run, discrimination reduces economic growth, and economic growth lowers discrimination. Also, we find that higher unemployment rates are associated with increased ethnic wage discrimination–in line with the predictions of Becker's theory of discrimination.