Social Interaction and the Minority-Majority Earnings Inequality: Why Being a Minority Hurts but being a big Minority Hurts More

Empirical findings that minorities typically attain lower economic status than majorities and that relatively larger minorities perform worse than smaller ones pose a challenge to economics.To explain this scale puzzle, I model an economy where the society is bifurcated into two social groups that differ in their size and sociocultural characteristics - the minority and the majority - and individuals form their human capital through social interaction in social networks.I establish that the different social group sizes and the sociocultural differences suffice to generate earnings inequality between the two social groups whenever sociocultural differences hinder social interaction between majority and minority individuals and there are networks effects in human capital acquisition.If there are, in addition, asymmetric information in the labor market and a choice of heterogeneous skills in the economy, minority and majority individuals tend to acquire different (combinations of) skills and the predicted patterns of income inequality comply with the scale puzzle under fairly general conditions.Moreover, in this study I offer an answer why some minorities do better than majorities, why minority individuals tend to spend more time socializing in families than in schools, and why integration may harm minorities.