Discrimination and Monopsony Power

Abstract

Wage inequalities between identical workers of different race, ethnicity, and gender are a persistent feature of labor markets. However, most labor market models either ignore important empirical evidence or focus very narrowly on specific labor market dynamics. To better understand such wage differences, we create a labor market model that integrates firm competition for workers, employee movement between jobs in response to market signals, potential monetary frictions in the job transition process, and workers' collective action which is a function of government support. Our model shows that because of gender- and race-specific historical and social outcomes, like the relatively lower household wealth of Black and Latino families and the increased household responsibilities of women, women and minority workers are more exploitable; employers can push their wage farther below the value of their marginal product. Also, our model shows that the cumulative wage gap for non-White women is greater than the additive gaps of being nonmale and non-White. Lastly, our model shows that a reduction in government support for collective action enables employers to wield monopsony power more freely, independent of changes in employer concentration. Because certain groups are more exploitable, employers' increased capability in wielding monopsony power means increased wage differentials replicating discriminatory biases against marginalized groups of workers.