In this article we study the effect of discrimination in the hiring of persons with disabilities on the effectiveness of public policies (wage subsidies). We first develop a job search model with matching and bargaining with participation decisions in the presence of employer taste based discrimination. This model allows us to separate the effect of discrimination from the effect of the productivity difference. We estimate the model using data from the Survey of Labour and Employment Dynamics (SLID) in Canada. The estimates suggest that employer discrimination is the main component explaining the bulk of the labour market inequalities between these two groups and, as such, it reduces the effects of policies aimed at integrating persons with disabilities into the labour market. Our estimates show that discrimination is also stronger against women than men in the rest of Canada. We estimate that 51% of employers are prejudiced against men with disabilities and 67% against women with disabilities. In Quebec, it is quite the opposite, with 65% of employers being biased against men versus 49% against women. Thus, we see that the presence of discrimination reduces the positive effects of the subsidy on hiring rates by 32% compared to a counterfactual situation where discrimination is absent.

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