Search Discrimination, Human Capital Accumulation and Intergenerational Mobility

Abstract

I develop a matching model with statistical discrimination and intergenerational mobility. Workers make both observable and unobservable investments before entering the market which affect their future productivity. Firms can search for workers based upon observable characteristics, be it observable investments, age, or some exogenous characteristic such as race. Multiple equilibria within each market can exist, one in which workers make unobservable investments and many firms search and one in which workers do not make unobservable investments and few firms search. Hence, two groups of workers that differ on an observable, exogenous characteristic (say, race) can be in two different equilibria. An equal opportunity law, where firms must search equally hard across the exogenous characteristic can remove the discriminatory outcome in one generation. However, if parents' investments decisions affect the investment decisions of their children, policies which remove the statistical discrimination by pooling the labor markets across the exogenous characteristic will still lead to unequal results in the short run. An affirmative action program which subsidizes investment for the group previously in the bad equilibrium will receive support for a time due to the positive externalities such investments have on the search options for the population. The program will receive more support the more individual there are who would not make the investment without the subsidy; there are no benefits to subsidizing workers who would make the investment anyway. Empirical predictions on the relationship between experience, education, and wages also result.