City Structure, Job Search and Labor Discrimination. Theory and Policy Implications

We consider a search-matching model in which black workers are discriminated againstand the job arrival rates of all workers depend on social networks as well as distance to jobs.Location choices are driven by the racial preferences of households (both blacks and whites)consciously choosing to trade off proximity to neighbors of similar racial backgrounds forproximity to jobs. Because of coordination failures in the location choices, multiple urbanequilibria emerge. There is a Spatial-Mismatch Equilibrium in which blacks reside far awayfrom jobs and experience high unemployment rates and a Spatial-Match Equilibrium in whichblacks are closer to jobs and experience lower unemployment rates. Under some reasonablecondition, we demonstrate that all workers are better off in the Spatial-Match Equilibrium.We then consider two policies: affirmative action, and employment subsidies to the firmswhich hire black workers. We show that the optimal policy requires imposing higher quotasin cities in which black workers reside far away from jobs than in cities in which they livecloser to jobs.