Can Public Intervention Mitigate the Welfare Effects of Discrimination?

A Reduced-Form Surplus-Sharing Search Model

Abstract

Despite strong legal frameworks prohibiting discrimination, unequal treatment across protected and unprotected groups remains widespread in labor markets. This paper studies whether anti-discrimination policies improve welfare when discriminatory practices are flexible across margins. I develop a reduced-form search model with endogenous vacancy creation and taste-based disutility, in which workers face a wage–probability trade-off. I analyze two stylized interventions: an Equal Pay Policy, which constrains wages, and a Quota Policy, which constrains job-finding probabilities. The paper shows that wage discrimination and hiring-probability discrimination are jointly determined and can substitute for one another. As a result, policies may achieve their formal equality objectives while reducing welfare. Equal Pay can eliminate wage differences but worsen protected workers’ job-finding probabilities when vacancy creation is not sufficiently elastic, whereas a quota can equalize hiring probabilities and indirectly equalize wages while pooling workers into a lower common allocation. The two policies also differ in incidence: Equal Pay pools wages but leaves employment probabilities group-specific, while the quota pools the full wage–probability allocation. The main policy implication is that anti-discrimination policies should be evaluated as equilibrium interventions affecting wages, vacancies, and employment probabilities, not only by their direct effect on the targeted margin.