Discrimination or Unobserved Differences in Characteristics?-An Empirical Study on Wage Inequality

We apply the discrimination search model with wage-tenure contracts to NLSY79 data to study race/gender wage inequality with a focus on distinguishing unobserved productivity differences from discrimination in the labor market and also simulating the pattern of wage dynamics. Our findings suggest that the productivity differential between black and white workers is 3% of white worker productivity while productivity differences between men and women are estimated to be 3% of male productivity. 91 % of firms are prejudiced towards black workers and 93% towards female workers. The distaste they hold towards black workers is about 70% of white worker productivity and towards women, 95% of male productivity. Compared to estimates in Bowlus and Eckstein (2002) and Flabbi (2010), we derive similar results on productivity differences, but much higher estimates on discrimination. In addition, our model predicts similar patterns of wage increases as observed from the data: First, the wage increases faster for men than women; second, the wage increases faster at low wages than high wages.