An Economic Theory of Labor Discrimination

22 Pages Posted: 26 Mar 2021

Date Written: March 24, 2021


This article presents a theory of labor discrimination based on the behavior of economic agents that maximize utility and profits. The article makes use of a monopsony that hires workers that have the same labor productivity, to focus on perfect discrimination; discrimination by quantities of labor hired; and discrimination by types of labor hired. The article concludes that in such contexts, workers with the same productivity may be discriminated in wages and quantities of labor hired, when firms make use of their market power; when there are differences in the opportunity costs and the wage elasticities of labor supply among workers; when there is asymmetric information, self-selection and adverse selection; and when firms or governments decide not to allow for wage discrimination. First best minimum wages may contribute to improve employment and welfare, but higher minimum wages may not.

Keywords: Monopsony, labor discrimination, asymmetric information, self-selection, adverse selection, market power

JEL Classification: J31, J42, J71

Suggested Citation

Vallejo, Hernan, An Economic Theory of Labor Discrimination (March 24, 2021). Documento CEDE No. 12, Available at SSRN: or

Hernan Vallejo (Contact Author)

Universidad de los Andes ( email )

Carrera 1a No. 18A-10
57-1-3394949 (Phone)
57-1-3324492 (Fax)


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