Working Paper: NBER ID: w23811
Authors: Ashley C. Craig; Roland G. Fryer Jr.
Abstract: We introduce a model of two-sided statistical discrimination in which worker and firm beliefs are complementary. Firms try to infer whether workers have made investments required for them to be productive, and simultaneously, workers try to deduce whether firms have made investments necessary for them to thrive. When multiple equilibria exist, group differences can be generated and sustained by either side of the interaction – workers or firms. Strategic complementarity complicates both empirical analysis designed to detect discrimination and policy meant to alleviate it. Affirmative action is much less effective than in traditional statistical discrimination models. More generally, we demonstrate the futility of one-sided policies to correct gender and racial disparities. We analyze a two-sided version of “investment insurance” – a policy in which the government (after observing a noisy version of the employer’s signal) offers to hire any worker who it believes to be qualified and whom the employer does not offer a job – and show that in our model it (weakly) dominates any alternative. The paper concludes by proposing a way to identify statistical discrimination when beliefs are complements.
Keywords: Statistical Discrimination; Labor Market; Investment Insurance; Affirmative Action; Two-Sided Market
JEL Codes: D0; D21; J0; J15; J16; J24; J7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm beliefs about minority workers (J82) | firm investment in supportive work environment (J29) |
| firm investment in supportive work environment (J29) | worker investment in human capital (J24) |
| worker investment in human capital (J24) | firm beliefs about minority workers (J82) |
| pessimistic beliefs of firms (D22) | lower firm investment in supportive work environment (J29) |
| lower firm investment in supportive work environment (J29) | discouragement of worker investment in human capital (J24) |
| affirmative action policies (J78) | undermine firm investment incentives (H32) |
| undermine firm investment incentives (H32) | trigger zero investment from minority workers (J79) |
| interaction of worker and firm beliefs (J29) | sustained group differences in labor market outcomes (J79) |