HKU Jockey Club Enterprise Sustainability Global Research Institute
World-Class Hub for Sustainability
Daniel Ferreira | Radoslawa Nikolowa | Elena S. Pikulina
Promotion-Driven Inequality
Apr 1, 2025
Key Takeaways
- Bias in promotion decisions creates career inequalities, influencing wages, firm composition, and overall labor market efficiency.
- In this paper’s model, workers differ only by a productivity-irrelevant label, “blue” or “red.” Firms are biased towards blue workers in promotions. In equilibrium, two types of firms emerge:
- Mixed firms attract both “blue” and “red” workers, offering risky but high-paying career paths.
- Red firms attract only “red” workers, offering safe, seniority-based career trajectories but with lower wages.
- A stronger bias against red workers raises wages in mixed firms while lowering them in red firms, altering firm size and composition—mixed firms grow larger but become less common in the economy.
- Paradoxically, bias harms both groups: red workers face limited opportunities, while blue workers experience weakened bargaining power.
- Firms, despite individually preferring neutrality, collectively benefit from bias as it enhances profits, functioning as an implicit collusion mechanism in the labor market.
Source Publication:
Ferreira, D., Nikolowa, R., & Pikulina, E. (2025). Promotion-Driven Inequality. SSRN Working Paper.
Understanding Promotion-Driven Inequality
Despite legal safeguards against workplace discrimination, subtle biases in promotion decisions persist, shaping career trajectories in ways that extend beyond individual firms. This study by Ferreira, Nikolowa, and Pikulina develops a theoretical framework to explore how promotion bias affects wages, firm composition, and overall market efficiency.
Bias in promotion decisions creates systematic labor market distortions. Firms favoring one worker group (“blue”) over another equally productive group (“red”) generate an equilibrium in which firms sort into two categories:
- Mixed firms, which attract both blue and red workers and offer risky promotions.
- Red firms, which exclusively attract red workers and rely on seniority-based promotion rules.
This labor market segmentation influences firm size, wage structures, and overall worker welfare. While mixed firms pay higher wages, they also expose workers to riskier career paths, whereas red firms provide stable but lower-paying opportunities.
The Role of Bias in Labor Market Segmentation
One of the study’s most counterintuitive findings is that bias—even when subtle—distorts worker incentives and firm dynamics. Firms that discriminate in promotions attract more blue workers, leading to larger firm sizes and higher wages, while red workers gravitate toward smaller, lower-paying firms that guarantee career progression. Despite offering higher wages, mixed firms are less attractive to red workers than to blue workers because biased promotions make career advancement significantly more uncertain for them.
The implications are profound: biased promotion practices create an artificial divide between firms, reducing efficiency and limiting worker mobility. Even blue workers, despite initially benefiting from bias, ultimately experience lower bargaining power, as firms exploit their reliance on risky promotion opportunities.
Wages, Firm Size, and the Hidden Cost of Bias
Bias alters wage structures across firms. Mixed firms, due to their competitive hiring process, offer higher wages to compensate for career uncertainty. In contrast, red firms, operating in a segregated labor market, provide stability at the cost of lower pay. A striking result of the model is that as bias intensifies, wages rise in mixed firms but decline in red firms, further exacerbating income inequality.
Beyond wages, bias affects firm size. Mixed firms expand their workforce as they attract more blue workers, while red firms shrink due to limited hiring pools. This uneven distribution of labor weakens the bargaining power of both groups, reinforcing a cycle where firms, rather than workers, dictate employment conditions.
Why Firms Benefit from Bias—At Society’s Expense
A crucial insight from this study is that while individual firms might prefer unbiased hiring and promotion policies, the labor market as a whole benefits from maintaining discrimination. Bias functions as an implicit collusion mechanism: by segmenting workers into separate career tracks, firms can reduce competition for top talent and suppress overall wage growth.
From a societal perspective, however, this outcome is inefficient. The segregation of firms based on biased promotion practices leads to misallocation of talent, reducing overall productivity and deepening inequality. Policies that promote transparency in promotion decisions and counteract subtle biases could therefore enhance labor market efficiency and worker welfare.
Conclusion: Rethinking Promotions for a More Equitable Workplace
This research challenges conventional wisdom on workplace discrimination by illustrating that even subtle biases in promotion decisions can have profound economic consequences. By creating distinct firm structures, altering wage dynamics, and weakening worker bargaining power, promotion bias not only disadvantages discriminated groups but also reshapes labor market equilibrium in ways that benefit firms at the expense of workers.
To foster a fairer and more efficient labor market, policymakers and business leaders must recognize the hidden costs of bias. Whether through transparent promotion policies, stronger regulatory oversight, or incentive structures that reward equitable career advancement, addressing promotion-driven inequality is key to ensuring both economic growth and social equity.