Working time and wage rate differences: Revisiting the role of preferences and labor scarcity

Abstract

In the labor economics literature, discrimination is often defined as occurring when identically productive workers, placed in the same working conditions, are assigned contracts involving, in particular, different hourly wage rates. This paper applies contract theory to explain how in some circumstances such differences take place, even if contract discrimination and productivity differences are strictly ruled out. It is assumed that worker types differ only in their consumption/leisure preferences and in their availability. A labor cost-minimizing firm offers a menu of labor contracts, and lets workers self-select. The model reveals external effects between types and the possibility of a paradoxical situation in which less demanding workers obtain a higher wage rate. A mixed employment regime always requires a minimum number (a quantum) of most demanding workers.