Can Public Intervention Mitigate the Welfare Effects of Discrimination?

A Reduced-Form Surplus-Sharing Search Model

Abstract

Despite legal protections, discrimination remains widespread in labor markets. This paper studies whether anti-discrimination policies improve welfare when discriminatory practices can shift across margins. I develop a reduced-form search model with endogenous vacancy creation and taste-based disutility, where workers face a wage–job-finding probability trade-off. I analyze two interventions: an Equal Pay Policy constraining wages and a Quota Policy constraining hiring probabilities. Wage and hiring discrimination are jointly determined and can substitute for one another, so policies may achieve formal equality while reducing welfare. Equal Pay can eliminate wage gaps but worsen protected workers’ job-finding probabilities when vacancy creation is insufficiently elastic. A quota can equalize hiring probabilities and indirectly wages, yet pool workers into a lower common allocation. The main implication is that anti-discrimination policies should be evaluated as equilibrium interventions affecting wages, vacancies, and employment probabilities, rather than solely by their effect on the targeted margin.