Journal of the European Economic Association, Forthcoming
25 Pages Posted: 12 Sep 2013
Date Written: December 5, 2012
We explore the combined effect of segregation in social networks, peer effects, and the relative size of a historically disadvantaged group on the incentives to invest in market-rewarded skills and the dynamics of inequality between social groups. We identify conditions under which group inequality will persist in the absence of differences in ability, credit constraints, or labor market discrimination when segregation is sufficiently great. Under these conditions, group inequality may be amplified if initial group differences are negligible. Increases in social integration may destabilize an unequal state and make group equality possible, but the distributional and human capital effects of this depend on the demographic composition of the population. When the size of the initially disadvantaged group is sufficiently small, integration can lower the long run costs of human capital investment in both groups and result in an increase the aggregate skill share. In contrast, when the initially disadvantaged group is large, integration can induce a fall in the aggregate skill share as the costs of human capital investment rise in both groups. We consider applications to concrete cases and policy implications.
Keywords: Segregation, Demography, Networks, Group Inequality, Human Capital
JEL Classification: D31, Z13, J71
Suggested Citation: Suggested Citation