The psychological underpinnings of labor market discrimination were investigated by having participants from Israel, the West Bank and Germany (N = 205) act as employers in a stylized employment task in which they ranked, set wages, and imposed a minimum effort level on applicants. State self-esteem was measured before and after the employment task, in which applicant ethnicity and sex were salient. The applicants were real people and all behavior was monetarily incentivized. Supporting the full self-esteem hypothesis of the social identity approach, low self-esteem in women was associated with assigning higher wages to women than to men, and such behavior was related to the maintenance of self-esteem. The narrower hypothesis that successful intergroup discrimination serves to protect self-esteem received broader support. Across all participants, both ethnicity- and sex-based discrimination of out-groups were associated with the maintenance of self-esteem, with the former showing a stronger association than the latter.