On the Degree and Consequences of Talent Misallocation for the United States

We develop a search and matching model linking unequal access to employment with wage gaps, labor misallocation, and income losses. We then use microeconomic data for millions of individuals across the United States over the period from 1960 to 2017, to explore the misallocation effects arising due to frictions related to race and gender and to quantify their impact on aggregate economic outcomes. We systematically find that women and non-whites receive lower wages compared to their counterparts with similar individual characteristics. Within our theoretical model, such wage gaps coexist with talent misallocation due to the presence of workers that are underprivileged as a result of their gender or race. State-level misallocation implied by our estimated wage gaps is negatively related to productivity and output at the state level over the period under study. Furthermore, calibrating the theoretical model to match the US economy, we find that a fall in white privilege has a sizeable positive effect on aggregate income.