Abstract:

I study labor markets in which firms both (1) hire via referrals and (2) are race-blind or "colorblind."  I develop an employment model showing that—despite initial equality in ability, employment, wages, and network structure—minorities receive disproportionately fewer jobs through referral and lower expected wages, simply because their social group is smaller.  This discriminatory outcome, which I term "social network discrimination," arises from homophily and falls outside the dominant economics discrimination models—taste-based and statistical.  I calibrate the model using a nationally-representative U.S. sample and estimate the lower-bound welfare gap caused by social network discrimination is up to 3.2 percent, disadvantaging black workers.  This paper isolates a potential underlying mechanism for inequality, adding to the understanding of labor market disparities that have been widely studied across the social sciences.  In doing so, the paper disproves the proposition that "colorblind" policies are inherently merit-promoting, thereby introducing a new rationale for race-conscious policy.