Ethnic Specialization and Earnings Inequality: Why Being a Minority Hurts But Being a Big Minority Hurts More

48 Pages Posted: 5 Apr 2006

See all articles by Martin Kahanec

Martin Kahanec

IZA Institute of Labor Economics; Central European University; Central European Labour Studies Institute

Date Written: March 2006


Social interaction is an important vehicle of human capital acquisition and its efficiency decreases in social distance. In this paper I establish that these two premises, given the socio-cultural differences between ethnic groups, explain the puzzling evidence that (i) minorities typically earn less than majorities, and (ii) this earnings gap is increasing in the relative size of a minority in a given region. In particular, I argue that inter-ethnic social distance disadvantages smaller ethnic groups in human capital acquisition and that these efficiency differentials systematically expose minority and majority individuals to different incentives as concerns their choice of skills. As a result, minority and majority individuals tend to acquire different (combinations of) skills and the textbook substitution effect drives an efficiency unit of minority labor to sell at a relatively lower wage in a region with higher percentage of minority people. The conditions under which the efficiency disadvantage of the minority in social interaction and the substitution effect explain the above-mentioned empirical findings are established. In addition, this study offers an answer why some minorities earn more than majorities, why minority individuals tend to spend more time socializing in families than in schools, and why integration may harm minorities.

Keywords: human capital, earnings inequality, labor market, minority, network

JEL Classification: J15, J24, J70, O15

Suggested Citation

Kahanec, Martin, Ethnic Specialization and Earnings Inequality: Why Being a Minority Hurts But Being a Big Minority Hurts More (March 2006). IZA Discussion Paper No. 2050. Available at SSRN:

Martin Kahanec (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072

Central European University ( email )

Nador utca 9
Budapest, H-1051

Central European Labour Studies Institute ( email )

Zvolensk√° 29
Bratislava, 82109


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