Eliminating persistent statistical discrimination: An analysis of several policy options

Abstract

I consider a model of endogenous human capital formation with competitively determined wages in a dynamic setting. In the presence of two distinguishable, but ex ante identical groups of workers, discrimination will be persistent in equilibrium. Using this framework, I then consider the effectiveness of three government policies designed to eliminate this discrimination. I determine the paths that workers will take after a policy is instated as well as how long a policy needs to be in place to guarantee the successful elimination of discrimination. The policies I consider are (1) a hiring subsidy that promotes the hiring of disadvantaged workers to the better job, (2) an investment voucher that defrays the monetary cost of human capital investment, and (3) an equal treatment policy under which firms are required to treat workers equally across groups. I find that all three policies have the potential to eliminate persistent discrimination if certain conditions are met. In a general equilibrium setting, I also address the welfare effects of the three policies for a parametric example.