Prejudice and Racial Matches in Employment

We develop a search model in which some employers hold unobservable racial prejudice towards black workers. Prejudiced employers may refuse to hire and may terminate black workers based on their prejudice. Workers do not observe employer prejudice, but they observe the race of their potential supervisor at the firm, which serves as a signal of the employer's prejudice. Jobs in firms with black supervisors hold higher option value for black workers, because they are less likely to face prejudice-based termination. Hence, black workers are willing to accept employment with lower expected match quality from firms with black supervisors. We derive theoretical predictions on differences in observed wages and job stability across supervisor race and prejudice levels. We find empirical support for our predictions using a unique longitudinal dataset with information on the worker's supervisor race matched with state-level measures of prejudice.