Statistical Discrimination from Composition Effects in the Market for Low Skilled Workers

In a random search environment with two racial groups each composed of identical numbers of high and low productivity workers, firms use an imperfect screening device (interviews) to control hiring. If inconclusive interviews lead firms to hire majority workers but not minority workers, then the unemployment pool for majority workers is of higher average quality. This can justify the initial hiring choices. The model is calibrated to the market for high-school drop-outs in the USA. Color blind hiring always eliminates racial disparities but is not necessarily beneficial; in the USA it would improve welfare but white unemployment would increase