A theory of discriminatory institutions, with applications to apartheid and to the political economy of migration

Abstract

Institutions in some societies force employers to discriminate. I develop a theory of institutionalized discrimination. Optimal discrimination sorts workers from different social groups into complementary tasks. Workers in the politically dominant social group benefit from complementary labor supplied by oppressed group workers, but are harmed by competition from oppressed group workers for access to non-labor factors of production. The tradeoff between these two forces determines whether ethnic cleansing, institutionalized discrimination, or free labor markets are optimal for workers in the dominant group. I present evidence from apartheid South Africa and from the regulation of migrant labor in contemporary economies.