Knowledge that Transforms

Do workers from social groups with comparable productivity distributions obtain comparable lifetime earnings? We study how a small amount of early-career discrimination propagates over time when workers’ productivity is revealed through employment. In breakdown learning environments that primarily track on-the-job failures, such discrimination spirals into a substantial lifetime earnings gap for groups of comparable productivity, whereas in breakthrough learning environments that track successes, early-career discrimination can be self-corrected, so comparable groups obtain comparable lifetime earnings. This contrast persists in large labor markets and with flexible wages, inconclusive learning, and misspecified employer beliefs.

We study a parsimonious model of a competitive labor market in which firms privately screen workers to identify talent. The equilibrium exhibits dispersion in wages and productivity; when talent is scarce, firms with superior screening skills post higher wages, attract better applicants, and recruit more talented workers. High-wage firms impose a compositional externality on low-wage firms, leading to equilibrium inefficiency: Welfare would be higher if low-skilled firms posted high wages and selected first. We also provide a micro-foundation for firms heterogeneous screening skills. When talented workers are better at screening (e.g. via superior referrals), a dynamic version of the economy converges to a unique steady state in which differences in talent, profits and screening skills persist forever.