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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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  • Kahanec, Martin

    ()
    (Central European University)

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:iza:izadps:dp2050

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

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Citations

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Cited by:
  1. 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).
  2. Gil S. Epstein, 2012. "Frontier Issues of the Political Economy of Migration," CReAM Discussion Paper Series 1224, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
  3. Gil Epstein, 2009. "Willingness to Assimilate and Ethnicity," Nordic Journal of Political Economy, Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 35, pages 1.
  4. Epstein, Gil S. & Gang, Ira N., 2010. "A Political Economy of the Immigrant Assimilation: Internal Dynamics," IZA Discussion Papers 5059, Institute for the Study of Labor (IZA).
  5. Epstein, Gil S., 2012. "Migrants, Ethnicity and the Welfare State," IZA Discussion Papers 6850, Institute for the Study of Labor (IZA).
  6. Carmel Chiswick, 2009. "The economic determinants of ethnic assimilation," Journal of Population Economics, Springer, Springer, vol. 22(4), pages 859-880, October.
  7. Gil S. Epstein & Yosef Mealem, 2010. "Interactions between Local and Migrant Workers at the Workplace," Development Working Papers 297, Centro Studi Luca d\'Agliano, University of Milano.

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