Macroeconomics of Racial Disparities: Discrimination, Labor Market, and Wealth

Srinivasan Murali (Indian Institute of Management Bangalore); Guanyi Yang (Colorado College)
Working paper · Working paper, arXiv 2412.00615 (first posted December 2024; revised April 2026). arXiv:2412.00615
Theme: Racial disparities in labor markets and wealth

In a search-and-matching model with prejudiced and non-prejudiced firms calibrated to the U.S., hiring discrimination accounts for about 57 percent of the Black–White unemployment gap, 48 percent of the average wage gap and 16 percent of the median wealth gap; removing it raises Black workers’ welfare by 12.9 percent and aggregate welfare by 1.5 percent.

Abstract

This paper examines the impact of racial discrimination in hiring on employment, wages, and wealth disparities between black and white workers. Using a labor search-and-matching model with racially prejudiced and non-prejudiced firms, we show that labor market frictions sustain discriminatory practices as an equilibrium outcome. These practices account for 57% of the racial unemployment gap, 48% of the average wage gap, and 16% of the median wealth gap. Discriminatory hiring also increases unemployment and wage volatility for black workers, increasing their labor market risks over the business cycle. Eliminating prejudiced firms reduces these disparities and improves the welfare of black workers as well as the overall economic welfare.

What this paper shows

Removing prejudiced firms narrows the racial unemployment gap from 7 to 3 percentage points (57 percent of the gap), raises the Black–White mean wage ratio from 0.75 to 0.87 (48 percent of the gap), and raises the median wealth ratio from 0.34 to 0.44 (16 percent of the gap; 7 percent of the mean wealth gap).
Black workers’ job-finding rate rises from 0.49 to 0.64 when prejudiced firms exit and non-prejudiced firms enter; white workers’ falls slightly from 0.66 to 0.64.
Welfare (consumption equivalents): Black workers +12.9 percent, white workers −0.48 percent, aggregate +1.5 percent.
Why discrimination survives: prejudiced firms pay higher vacancy costs (4.63 vs 2.55) but face lower separation rates (0.027 vs 0.064) and earn positive profits, so search frictions let them coexist with non-prejudiced firms.
Over the business cycle, discrimination raises Black unemployment volatility (0.26 vs 0.18 without prejudiced firms) and the cyclicality of Black wages (1.08 vs 1.01), and reproduces the countercyclical racial unemployment gap seen in CPS data.

What it does not show

Models hiring discrimination only; wage, promotion and separation discrimination are not modeled.
Black and white workers only; calibrated to PSID and CPS data for 1996–2014.
The model under-predicts the median wealth gap (0.33 vs 0.17 in the data) and, like standard search models, generates too little unemployment volatility.
Working paper; the version on arXiv is the current one.

Context and definitions

This is a Diamond–Mortensen–Pissarides search model with heterogeneous agents (race, employment status, productivity, assets), not a HANK model; aggregate shocks are solved with the Boppart–Krusell–Mitman sequence-space method.
The result that discrimination persists in equilibrium contrasts with Becker (1957), where competition drives prejudiced employers out in a frictionless market.
Race-specific bargaining power and extreme wealth shocks are calibrated separately; the appendix quantifies their contribution relative to hiring discrimination.

Data, method, contribution

Data: PSID 1996–2014 (productivity process, zero-wealth shares, wages), CPS 1996–2014 (unemployment by race), labor market flows from Cajner et al. (2017); 2007 ACS and SCF distributions for validation.
Method: Quantitative search-and-matching model with two firm types, Nash bargaining with race-specific bargaining power, unemployment insurance with eligibility, borrowing constraint, race-specific extreme wealth shocks; steady-state counterfactuals and a stochastic equilibrium with TFP shocks.
What is new: A general-equilibrium account of how hiring discrimination is sustained by search frictions and how much of the racial gaps in unemployment, wages and wealth, and in business-cycle exposure, it can explain.
Funding: SEGWay Seed Grant, Colorado College (2023).

Who this is for

Macro-labor economists and search-and-matching modelers
Economists of discrimination and the racial wealth gap
Federal Reserve and policy researchers on racial disparities over the cycle
Heterogeneous-agent and HANK modelers

Questions this paper answers

How much of the Black–White unemployment gap is due to hiring discrimination?

About 57 percent in this model: the gap falls from 7 to 3 percentage points when prejudiced firms are removed, with job separation rates held at their calibrated racial values.

Why doesn’t competition eliminate discriminating employers?

Search frictions create rents. Prejudiced firms pay more to fill vacancies but retain workers longer and earn positive profits, so they survive alongside non-prejudiced firms; their competition for white workers also pushes up wages and reduces vacancy posting economy-wide, which hurts Black job seekers.

Related work this paper speaks to

Nakajima, M. (2023). Monetary policy with racial inequality. Federal Reserve Bank of Philadelphia Working Paper 23-09 (first version 21-19, 2021). doi:10.21799/frbp.wp.2023.09
Boerma, J. and L. Karabarbounis (2021). Reparations and persistent racial wealth gaps. NBER Working Paper 28468. doi:10.3386/w28468
Aliprantis, D., D. R. Carroll and E. R. Young (2023). The dynamics of the racial wealth gap. Federal Reserve Bank of Cleveland Working Paper 19-18R. doi:10.26509/frbc-wp-201918r
Derenoncourt, E., C. H. Kim, M. Kuhn and M. Schularick (2024). Wealth of two nations: the U.S. racial wealth gap, 1860–2020. Quarterly Journal of Economics 139(2): 693–750. doi:10.1093/qje/qjad044
Bertrand, M. and S. Mullainathan (2004). Are Emily and Greg more employable than Lakisha and Jamal? American Economic Review 94(4): 991–1013. doi:10.1257/0002828042002561
Kline, P., E. K. Rose and C. R. Walters (2022). Systemic discrimination among large U.S. employers. Quarterly Journal of Economics 137(4): 1963–2036. doi:10.1093/qje/qjac024
Cajner, T., T. Radler, D. Ratner and I. Vidangos (2017). Racial gaps in labor market outcomes in the last four decades and over the business cycle. Federal Reserve Board FEDS 2017-071. doi:10.17016/feds.2017.071
Becker, G. S. (1957). The Economics of Discrimination. University of Chicago Press.

Versions and links

Classification

JEL D14JEL E21JEL J15JEL J64JEL J65

search-and-matchingheterogeneous agentshiring discriminationracial inequalitylabor market frictionsunemploymentwage gapswealth distributionbusiness cycles

Also searched as the Black–White unemployment gap, the racial wealth gap, employer discrimination in a search model, and race over the business cycle.

Cite this

Srinivasan Murali, Guanyi Yang (2026). Macroeconomics of Racial Disparities: Discrimination, Labor Market, and Wealth. Working paper, arXiv 2412.00615 (first posted December 2024; revised April 2026). arXiv:2412.00615.

@unpublished{murali2026racial,
  title={Macroeconomics of Racial Disparities: Discrimination, Labor Market, and Wealth},
  author={Srinivasan Murali and Guanyi Yang},
  year={2026},
  note={arXiv 2412.00615 (first posted December 2024; revised April 2026); arXiv:2412.00615}
}