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We have already seen that labour market disadvantage can take various forms. Equally, discrimination in the labour market itself can manifest itself in different.
Table of contents
- Dual labour market
- Wage Differentials (Labour Markets)
- Employment Discrimination | Microeconomics
- Specifications that use this resource:
In both cases, discrimination increases the profits of all firms, but more so in unprejudiced than in prejudiced firms.
Dual labour market
Moreover, profits are higher for unprejudiced firms and when these alternate with prejudiced firms. They increase with the taste for discrimination. Prejudiced firms make less profit but these increase with the proximity of similar firms. To summarize the results here, the presence of one prejudiced firm on the market induces a lower wage for all of the workers who are discriminated against, as in the model of Black In addition, unprejudiced firms also make additional profit and have little incentive to compete against each other to drive out prejudiced firms.
If they did, prejudiced firms would be replaced by non-discriminatory firms, reducing the profits of established firms. Last but not least, firms make more profit when they are located in an area close to similar firms. Becker assumes that competition affects the extent of discrimination on the labor market.
The more competition there is, the less the taste for discrimination can be satisfied. We here analyze how a new firm on the market impacts discrimination and show that the presence of imperfection on the labor market reduces the impact of competition in the product market on discrimination. Two different types of entry are modelized. An increase in the number of firms n , due to lower entry costs F or better technology, has a positive effect on labor market competition. The more firms there are on the market, the closer we are to perfect competition.
If we consider this change at the beginning of the game, this model is static and firms are uniformly distributed around the circle. As the number of firms increases, and if they remain uniformly distributed, then the distance between firms is reduced and the impact of transportation costs on wages is lower. Wages thus rise with the number of firms and become closer to worker productivity as commuting costs become smaller.
Even so, the impact of discrimination remains the same as that described above. The presence of some commuting costs prevents the total disappearance of discrimination. Nevertheless, the effect is different if the dispersion of existing firms is invariant. If existing firms are already located on the circle, and the new one is inserted between two old firms, then firms are no longer uniformly distributed around the circle and the distribution of market power changes.
The market power of firms in the neighborhood of the new entrant falls, whereas that of firms further away rises. The former consequently fix a lower wage than do the others. Indeed, firms do not differentiate workers located on the right side from workers of the other side. As the market is asymmetrical, firms further away could take over workers of their neighbors, which set a lower wage to compete against the new firm. In both cases: a new unprejudiced firm reduces the impact of discriminatory tastes whereas a new prejudiced firm increases it.
Moreover the new firm, whether prejudiced or not, will choose to set up in the neighborhood of prejudiced firms in order to pay Red workers less. The introduction of a prejudiced new firm will also lower the wages of Reds in other firms. An unprejudiced firm with prejudiced neighbors employs more Red workers than its neighbors; it also earns more profits than its neighbors as it hires more Red workers and earns more profits than if it had located in an area with non-prejudiced neighbors.
Wage Differentials (Labour Markets)
The new firm thus benefits from the presence of prejudiced firms in its immediate neighborhood. New firm entry therefore affects the sharing of market power. Strategically, the new entrant will locate where the greatest number of prejudiced firms are found but does not systematically decrease discrimination. This welfare increases when competition on the labor market is higher t lower or n F higher. The impact of discrimination is more ambiguous: when d is higher, the surplus of firms increases but the welfare of workers decreases, depending on the number of Reds.
Derivatives are in Appendix Appendix 5: welfare derivatives. Prejudiced and unprejudiced firms alternate on the circle city.
Employment Discrimination | Microeconomics
The government can decide to subsidize the wages of Reds in order to compensate for discrimination. This policy is not currently used in order to decrease gender gap. However, it exists concerning young people and low-skilled workers in France for instance, the most remote from employment in Canada or disabled in several countries. In both cases, the subsidy on the wages of Red workers raises the wages of Reds by the amount of the subsidy whatever the firm. The method of subsidy funding only changes the impact of the policy on the global welfare and the wages of Greens.
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In the case of borrowing and as our workers are not forward looking, the wages of Greens are unchanged and welfare increases. If the government has to balance receipts and expenses, subsidies are borne by all workers, so this is equivalent to a tax on the hiring of Green workers and the total welfare remains constant. Within workers, Greens lose a part of their surplus whereas Reds increase their welfare. With a policy of wage equalization, firms have to offer the same wage to all equally productive workers. This policy exists in most of countries.
Wage equality between men and women doing equal work has been introduced in in the USA law and in the Treaty in order to fight gender discrimination among others. In spite of the introduction of legal principles, the difference between wages of women and men remains large— Firms set a single wage, and the wage gap totally vanishes within each firm.
The wage now depends on the proportion of Reds in the working population. Moreover, unprejudiced firms employ a greater number of both Red and Green workers than do prejudiced firms due to the higher wage. Nevertheless, the wages of Greens are lower than they would have been without the policy. The global welfare slightly decreases due to this policy.
The disappearance of the direct impact of discrimination on wages within firms negatively affects the well-being of the majority group and increases the wage of Reds. Consequently, in a democratic system where economic agents maximize their revenues, the government will have no political incentive to reduce discrimination for fear of not being re-elected. Introduction of a minimum wage is a frequent policy to alleviate the poverty of working poor.
Blumkin and Danziger show that this policy can be socially beneficial to supplement an optimal tax-and-transfer system. However, depending on the level of minimum wage, wage distribution is truncated for low productivity workers. In this case, it could have a negative impact on employment Addison et al. Only few developed countries did not adopt the minimum wage.
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Germany introduces it in , and Italy plans to do it. In our study, this policy aims at increasing Red wages and consequently reducing wage gap. Three different cases can arise. The minimum wage is binding for all wages; it is binding for Red wages only; it is binding for Red wages of prejudiced firms. I study the last case as the results of the second case are more complicated and the comparison is not easy.
Theoretically, the welfare should be between the benchmark case and the case when minimum wage is binding for all Red wages. Green wages are not impacted by minimum wage. Minimum wage induces a decrease of the wage gap between Reds and Greens. Red treatment is identical whatever the type of the firm.
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As shown in the literature, 5 the existence of monopsony power raises the possibility that minimum wage increases employment. Affirmative action policies take different forms, ranging from requirements to give special consideration to those from minority groups to setting quotas on employment of minority workers. Affirmative action policy was introduced in the USA to promote blacks in education system and labor market.
For instance in France, firms have to hire a quota of disable people or to pay a tax. Concerning women, targets and quotas for the promotion or recruitment of women in employment are rarer. Recently, some countries have adopted legislation aimed at a more balanced gender representation in company boards Finland, France, Germany, Italy, etc.
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In our model, affirmative action consists in imposing a quota of minority workers on firms. This secures a minimum level of employment for workers who are discriminated against in each firm. The presence of the quota of Red workers affects all wages in all firms. The introduction of affirmative action increases the demand for the labor of Red workers in prejudiced firms and relatively reduces the demand for Green workers.
This impact depends on the quota and the proportion of Red workers on the circle: the closer these two percentage terms are, the tighter is the market for Red workers and the higher is the wage of Reds. The general impact of the affirmative action policy is also positive for the wages of workers who are discriminated against and negative for the wages of workers belonging to the majority. The effect on the wages of workers in prejudiced firms is twice as high as that in unprejudiced firms. As discriminatory firms now employ relatively more Reds and fewer Greens than beforehand, Red wages have to be higher and Green wages lower to attract the required number of workers to the firm.
However, as the Greens are the majority of the working population, governments which want to be re-elected will have little incentive to introduce this policy. Investments in transportation infrastructure or in improving the city transportation network lead to lower commuting costs for all workers in the city. The project will improve access to the economic centers of Paris and its suburbs. In the model, this policy implies lower t. Moreover, the global welfare increases further to the policy if the project is not funded by taxes.
Otherwise, the total welfare only increases if investment return is positive. A transport policy thus increases wages and leads to a relative fall in the wage gap between the majority and the minority. In the particular case of sufficiently low commuting costs, the effect on discrimination is not straightforward. A second indirect policy consists in subsidizing commuting costs. This is used to help particular populations e. For instance in France, employment agencies reimburse to unemployed commuting costs to a firm.
However, payroll is not impacted by this policy and prejudiced firms hire less Reds than Greens. Firms lose a part of their market power on Reds because their commuting costs decreases. To conclude this section, indirect policy aiming at increasing labor market competition via better transport increases wages, but the wage gap remains the same in value. On the contrary, a transport subsidy for workers discriminated against leads to an increase of global welfare and a decrease of the wage gap.
Wage equalization and affirmative action are more efficient policies: however, governments of economic agents maximizing their revenues have little incentive to introduce them as they reduce majority well-being. This paper has shown that a taste-based model of discrimination can match the stylized facts of the persistence of discrimination.
The model is based on the heterogeneity of worker preferences, which yields non-negligible employer market power over their workers. This assumption induces a wage gap, which will not disappear in equilibrium, reinforcing findings of previous models.