In the labor market, statistical discrimination occurs when employers’ beliefs about workers’ behavior induces different groups of workers to invest at a different rate in their education. Thus, even though the groups are identical ex ante, the beliefs of the employers are fullfilled and sustained in equilibrium. Theoretically and in an experiment, we investigate under what circumstances statistical discrimination occurs. We confirm the experimental result of Fryer, Goeree and Holt (2005) who do not find systematic evidence for statistical discrimination in the standard signaling setup of Coate and Loury (1993). When we introduce competition between workers of different groups for the same job, the non-discrimination equilibrium ceases to be stable. In agreement with this theoretical result, we find systematic discrimination in the experimental treatment where we let workers of different groups compete for the same job. In contrast to the standard theoretical model, a substantial minority of the employers refuses to discriminate even when it is in their best interest to do so. A game theoretic model that allows a proportion of the employers to remain color blind organizes the main pattern in the data.