Occupational Segregation and the (Mis)allocation of Talent

• Author: David Pothier
• DOI: http://doi.org/10.1111/sjoe.12206
• Published date: 01 January 2018
• Date: 01 January 2018

©The editors of The Scandinavian Journal of Economics 2016.

Scand. J. of Economics 120(1), 242–267, 2018

DOI: 10.1111/sjoe.12206

Occupational Segregation and the

(Mis)allocation of Talent*

David Pothier†

DIW Berlin, DE-10117 Berlin, Germany

dpothier@diw.de

Abstract

In this paper, I study how occupational segregation affects the allocation of talent

in a competitive labour market. I propose a model of occupational choice in which

heterogeneous workers must rely on their social contacts to acquire job-vacancy information.

While occupational segregation implies benefits in terms of job-finding probability, it

also leads to allocative inefficiencies. Efficient and equilibrium outcomes differ due to a

network externality that leads workers to segregate too little, and a pecuniary externality

that leads workers to segregate too much. Which effect dominates depends on the

elasticity of wages to changes in the degree of occupational segregation.

Keywords: Allocation of talent; occupational choice; social networks

JEL classification:D62; E24; J24

I. Introduction

Occupational choice often depends not only on idiosyncratic characteristics

(e.g., innate ability), but also on the occupations chosen by family, friends,

and peers. Sociologists have coined the term “occupational segregation” to

refer to the sorting of individuals across occupations based on their social,

religious, ethnic, and/or gender identity. Such segregation is a prevalent

feature of labour markets, and has been shown to be an important cause

of wage and employment disparities between social groups.1However,

much less is known about how it affects the allocation of talent (i.e., the

matching of skills to tasks) in the labour market.

In this paper, I study the allocative implications of occupational segregation.

The analysis centres around a theoretical model of occupational choice

in which workers must rely on informal social networks to access job-

*I wish to thank Piero Gottardi, Fernando Vega-Redondo, Jan Eeckhout, Claudio Michelacci,

participants of the EUI Microeconomics WorkingGroup and the DIW Public Economics Cluster

Seminar, and two anonymous referees for useful comments and suggestions. Financial support

from the French Ministry of Education and Research is gratefully acknowledged.

†Current affiliation: University of Vienna, 1090 Vienna, Austria

(email: david.pothier@univie.ac.at).

1See, for example, the studies by Albelda (1986) and King (1992).

D. Pothier 243

vacancy information. It builds on an idea originally put forward by Arrow

(1998), who argued that the widespread use of referral networks in labour

markets is an important cause of occupational segregation.2A more recent

paper by Buhai and Leij (2006) formalizes Arrow’s original intuition,

and shows that occupational segregation can be supported in equilibrium

whenever individuals are disproportionately likely to form ties with other

individuals belonging to the same social group – a phenomenon referred

to as “homophilic inbreeding”.3To study the allocative implications of

occupational segregation, I extend their work by assuming that workers

differ in terms of some publicly unobservable skill characteristic that

determines both the cost of specializing in different occupations and their

productivity if employed by a firm.

The assumption that workers must incur some specialization costs before

entering the labour market implies that they face a trade-off when choosing

an occupation. On the one hand, they prefer to choose an occupation that

is popular among their social contacts, as this increases the probability that

they find a job.4On the other hand, they prefer to choose an occupation in

which they are relatively more able, as this minimizes the costs they must

incur before searching for a job. The equilibrium degree of occupational

segregation is determined by the relative magnitude of these two effects.

The assumption that workers differ in terms of their productivity further

implies that aggregate output depends on the allocation of talent across

occupations. Inter alia, the model suggests that increases in the degree

of segregation should lead to a decrease in equilibrium wages due to a

misallocation of talent in the labour market.

The key result of this paper pertains to the normative consequences

of occupational segregation. Contrary to Buhai and Leij (2006), who

find that occupational segregation is always desirable when workers are

homogeneous in terms of their productivity, I show that the conditions

needed for occupational segregation to be supported in equilibrium are

generally not the same as those needed for it to be efficient. In particular,

I show that workers’ reliance on social contacts to acquire job-vacancy

information generates a positive externality: by choosing to specialize

2Empirical work dating back to Granovetter (1973) suggests that between 30 and 50 percent

of all jobs are found using informal social networks.

3There exists a wealth of empirical evidence demonstrating that such homophilic inbreeding

is a widespread social phenomenon. See, for example, the landmark study by McPherson

et al. (2001).

4This effect is consistent with recent empirical evidence showing that the use of social

contacts in job search increases the probability of employment. For example, using a panel of

local-authority-level data from England between 1993 and 2003, Patacchini and Zenou (2012)

find that increases in ethnic population density (meant to proxy for social networks and the

transmission of job-vacancy information) increase the ethnic employment rate.

©The editors of The Scandinavian Journal of Economics 2016.