Racial disparities in labor outcomes: The effects of hiring discrimination over the business cycle

Abstract

The resume audit literature provides strong evidence of discriminatory practices in hiring, raising critical concerns regarding equitable labor market outcomes. While the impacts of these practices on disparities in labor market levels are better understood, their cyclical effects are less known. In this paper, we research how hiring discrimination affects the volatility of labor market outcomes for disadvantaged groups by integrating empirical findings from audit studies into a search-and-matching model with a modified urn-ball matching function. Intuitively, in recessions, there are more applicants per job opening, which hurts discriminated groups. Applying this model to the U.S. economy, we find that it accounts for approximately 70% of the excess business cycle volatility in the unemployment rates of African Americans, as recorded in CPS data. Our research highlights the broader economic implications of discrimination, stressing the necessity for policy interventions, and offers a novel framework for future studies on labor market inequalities.