GOVERNMENT-MANDATED DISCRIMINATORY POLICIES: THEORY AND EVIDENCE∗

We study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector. Government regulation allows native majority workers to be employed in the public sector with positive probability while excluding the minority from it.We show that even when the public sector offers the highest wage rate, it is still possible that the discriminated group is, on average, economically more successful. The widening Chinese/Malay wage gap in Malaysia since the adoption of its New Economic Policy in 1970 supports our model.