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

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Author Info
Martin Kahanec () (IZA Bonn)

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Abstract

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 abovementioned 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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2050.

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Length: 48 pages
Date of creation: Mar 2006
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Handle: RePEc:iza:izadps:dp2050

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Related research
Keywords: human capital; earnings inequality; labor market; minority; network externalities; social interaction; ethnic specialization;

Other versions of this item:

Find related papers by JEL classification:
J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities and Races; Non-labor Discrimination
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J70 - Labor and Demographic Economics - - Labor Discrimination - - - General
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carmel U. Chiswick, 2006. "The Economic Determinants of Ethnic Assimilation," IZA Discussion Papers 2212, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Epstein, Gil S. & Gang, Ira N., 2008. "Ethnicity, Assimilation and Harassment in the Labor Market," IZA Discussion Papers 3591, Institute for the Study of Labor (IZA). [Downloadable!]
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