Labor market discrimination and endogenous worker characteristics

Studies show that more than 50\% or more of the wage gap between black and white males is explained by factors that are determined even before an individual enters the labor force (Blinder, 1973; Cotton, 1998, Neal and Johnson, 1996; Carneiro et al 2005). Such pre-market factors include, among others, the quality of school attended and number of years of schooling (or degree attained). The latter, in particular, is a decision variable of the individual that is typically taken to be independent of (or exogenous to) market discrimination. However, expectations of future labor market discrimination arguably have an impact on the pre-market decision of educational choice. Our project explores this key endogenous link between the two. In a model of statistical discrimination based on the quality of schools attended by black men verses white men, we show that forward looking individuals, in their goal to maximize their expected labor market outcome in the future, weigh both their marginal benefits and costs of education. In this problem, therefore the optimal schooling choice is an endogenous decision variable. Such a framework is essential for uncovering the extent of discrimination in labor markets relative to the extent of the wage gap determined by pre market discrimination, pre market factors, and decisions that take place before an individual participates in the labor force. From an empirical standpoint, we address the potential endogeneity of schooling choice through a two stage least squares (2SLS) model by treating the average within-race lifespan as the instrument. We apply our approach to the National Longitudinal Survey of Youth (NLSY) dataset.