A Political Economy of Social Discrimination

Abstract

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 markets in which workers with minority traits 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 identity obtain better labor market outcomes in an equilibrium with discrimination than without. Office-motivated candidates then have electoral incentives to propose symbolic policies targeting the minority to trigger social discrimination in the labor market. As majority-identity workers are better off with social discrimination and the economy shrinks, the implementation of symbolic policies is associated with lower taxes and less redistribution. 

Keywords: Unemployment, Productivity, Redistribution, Identity Politics, Populism, Burqa, Minority

JEL Classification: D70, J71, J78, J60, J64