Testing for Employee Discrimination using Matched Employer-Employee Data: Theory and Evidence

We use recent matched employer-employee data to directly investigate if white workers have a taste for racial discrimination in Britain. Based on a new structural model with individual and firm heterogeneity, we develop and test two predictions. Firstly, white employees with a taste for discrimination should report lower levels of job satisfaction the larger the proportion of ethnic minorities at their workplace. Secondly, white employees would have to be compensated by higher wages if required to work alongside ethnic minority co-workers. Both hypotheses are clearly supported for white males in our data, after comprehensively controlling for individual, job, and workplace characteristics. However, the evidence is weaker for females. The white male wage premium for working amongst only ethnic minority co-workers, as compared to working only with whites, is about 12%. Importantly, it appears that neither of these effects operates via realised racial prejudice at the workplace or white employees' feelings concerning their job security.