Promotion-Driven Inequality

Abstract

We present a model of promotions where vacancies, wages, and internal career paths are endogenously determined in a labor market equilibrium. Workers differ only by a non-productive label: "blue" or "red." Firms are biased towards blue workers in promotions. In equilibrium, two types of firms emerge: (i) "Mixed firms" hire both types of workers, offer risky career paths (where promotion is not guaranteed), are large, and pay high wages; (ii) "Red firms" hire only red workers, offer safe careers with seniority-based promotions, are small, and pay low wages. A large bias against red workers is socially inefficient and harms both worker types. Although firms individually prefer to be unbiased, paradoxically, they collectively benefit from the bias, as equilibrium profits increase with the bias. Our model provides numerous testable predictions, which can guide future empirical work on promotions, discrimination, and inequality.

Keywords: Promotions, Discrimination, Inequality