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A society reserves certain jobs for members of a politically dominant
social group to maximize the wages of workers in that group.
Through an appropriate choice of reserved jobs, the dominant
group chooses both the size of the set of reserved jobs and the elasticity
of substitution between reserved and unreserved jobs. Optimal
discrimination endogenously creates categories of “good” and
“bad” jobs and assigns workers from different social groups into
these different categories. The relative scarcity of labor determines
whether discrimination or free labor markets are optimal. I apply
the model to apartheid South Africa and other discriminatory societies.
