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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.

Suggested Citation

  • Kahanec, Martin, 2006. "Ethnic Specialization and Earnings Inequality: Why Being a Minority Hurts but Being a Big Minority Hurts More," IZA Discussion Papers 2050, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2050
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    Citations

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    Cited by:

    1. Carmel Chiswick, 2009. "The economic determinants of ethnic assimilation," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(4), pages 859-880, October.
    2. Gil S. Epstein, 2012. "Migrants, Ethnicity and the Welfare State," Korean Economic Review, Korean Economic Association, vol. 28, pages 117-136.
    3. Epstein, Gil S. & Mealem, Yosef, 2010. "Interactions between Local and Migrant Workers at the Workplace," IZA Discussion Papers 5051, Institute for the Study of Labor (IZA).
    4. Gil S. Epstein, 2013. "Frontier issues of the political economy of migration," Chapters,in: International Handbook on the Economics of Migration, chapter 22, pages 411-431 Edward Elgar Publishing.
    5. Abdulloev, Ilhom & Epstein, Gil S. & Gang, Ira N., 2014. "Ethnic Goods and Immigrant Assimilation," IZA Discussion Papers 8004, Institute for the Study of Labor (IZA).
    6. Gil S. Epstein & Ira N. Gang, 2010. "A Political Economy of the Immigrant Assimilation: Internal Dynamics," Working Papers 2010-13, Bar-Ilan University, Department of Economics.
    7. 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).
    8. Epstein, Gil S. & Heizler (Cohen), Odelia, 2009. "Network Formations among Immigrants and Natives," IZA Discussion Papers 4234, Institute for the Study of Labor (IZA).
    9. Tito Boeri & Marta De Philippis & Eleonora Patacchini & Michele Pellizzari, 2011. "Immigration, Housing Discrimination and Employment," Working Papers 390, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Gil Epstein, 2009. "Willingness to Assimilate and Ethnicity," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 35, pages 1-1.

    More about this item

    Keywords

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

    JEL classification:

    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; 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, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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