Monopsony, Wage Discrimination, and Public Policy
AbstractA vast number of empirical studies have found that some degree of monopsony power is pervasive in labor markets. As a result, there is a certain amount of monopsonistic exploitation as defined by Joan Robinson. In some circumstances, the exercise of monopsony results in wage discrimination that is not due to prejudice. Instead, it is due to profit maximization in the presence of differences in the labor supply functions of the protected and unprotected groups. In this paper, we present this result in a general setting and explore several specific examples. The theoretical results of these analyses are consistent with the empirical literature.
At the federal level, public policy forbidding wage discrimination is contained in the Equal Pay Act of 1963, and Title VII of the Civil Rights Act of 1964. Although neither statute provides for public sanctions, violators of either statute are vulnerable to private damage suits. We examine the economic consequences of these public policies in two cases. First, we examine the consequences for profit maximization for an employer that obeys the law and ignores the differences in the labor supply functions. Here we find the possibility of multiple equilibria since the marginal expenditure function will be discontinuous. The resulting wage is between the wages paid to the favored and disfavored groups. Second, we analyze the consequences for a discriminating employer who is discovered and must eliminate the discrimination. The employer will be required to raise the wage of the disfavored group to equal the wage of the favored group. The result is analogous to a minimum wage equal to the favored group's wage. The employer will be unable to exercise monopsony power over a range of employment. Under some conditions, employment of the disfavored group will expand at the higher wage.