The Effect of Statistical Discrimination on Black-White Wage Inequality: Estimating a Model with Multiple Equilibria

Abstract

This paper presents the structural estimation of a statistical discrimination model where wage differentials can be generated by self-fulfilling expectations about group productivities. Although the model is capable of displaying multiple equilibria, an estimation strategy that identifies both the parameters of the model and the equilibrium chosen by the economic agents is developed and empirically implemented. The model is estimated three times using U.S. black and white male wage data from 1964 to 1996. In addition to recovering the selected equilibrium, all of the equilibria that the model could have displayed under the estimated set of fundamentals are computed. A comparison between the equilibria that were selected in the economy over time and the other potential equilibria reveals that the outcome with essentially the lowest wage inequality have been selected whenever the estimated parameters are consistent with multiple equilibria. This implies that self-fulfilling expectations did not exacerbate wage differentials in the U.S. and that the decline in wage inequality experienced in the U.S. economy in the last thirty years cannot be attributed to changes in the equilibrium selection. A simulation is also performed to compute equilibrium wages in a "color blind society" where employers cannot distinguish their employees for their ethnicity. Results show that black males' average wage would be 24.5% higher and whites' wage would be 2.2% lower.

Keywords: Statistical Discrimination

JEL Classification: J71, C10