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: Suggested Citation