Social interaction in the labor market: Essays on earnings inequality, labor substitutability, and segregation

Why are most minority groups relatively poor? Why are they poorer in regions where they constitute a relatively large share of the population? Why desegregation of minority people goes hand in hand with increasing inter-ethnic earnings differential? And what are the mutual effects of the presence of various ethnic groups in the labor market on their earnings? The purpose of this thesis is to answer this kind of questions about social and economic interaction of people of different ethnicity, thereby furthering our understanding of the complexities of ethnic and racial relations. In order to accomplish this task, I look into the roles of (i) local spillover effects in human capital acquisition and (ii) social distance between people of different ethnicities in social interaction. It is established that the interaction of such social distances and spillover effects in social interaction of different ethnic groups has important consequences for their labor market outcomes. Perhaps the most important findings of this thesis are that (i) social interaction of different ethnic groups promotes their specialization, (ii) although integration facilitates human capital acquisition, it exposes minority individuals to more intense competition that lowers their relative wage per efficiency unit of labor, (iii) minority and majority labor is complementary in production and thus, in terms of efficiency, majority people benefit from presence of minority co-workers and there are benefits to multiethnic labor force in production, and (iv) the improvement in information and communication technologies promotes desegregation but increases interethnic earnings inequality.