Inequality in pay and promotions between black and white workers increases over the life cycle. We decompose the sources of this inequality using a dynamic Roy model that incorporates a job ladder, on-the-job training, compensating differentials, growth in observed and unobserved skills, and discrimination. We develop a two-step estimator to accommodate a flexible structure of dynamic unobserved heterogeneity and recover the model’s structural parameters. Our estimates and counterfactual exercises show that pre-market discrimination plays a large role in racial gaps, especially for long- run inequality at the bottom of the wage distribution. However, pay and promotion discrimination has a large effect at higher-skill occupations, except at the very top occupations.

This talk is presented by the Labor Economics Seminar, sponsored in part by the Department of Economics with generous gifts given through the Abraham and Thelma Zwerdling Labor Economics Program.