The Influence of Market Structure on Labor Market Discrimination

Abstract

The motivation for this book comes from many years of involvement in an often acrimonious debate over the influence of increased product market competition on labor market outcomes. This debate is often phrased as whether product competition reduces labor market discrimination. The formal suggestion that it does reduce discrimination nears its fiftieth birthday as Nobel Prize winner Gary Becker (1957) first proposed what is often referred to as the “neoclassical” theory of discrimination. The essence of that proposal is that prejudice is costly. The desire to replace a more efficient worker with a less efficient worker because of preferences over gender, race, ethnicity, or religion reduces the profit that would otherwise be earned. Thus, asks Becker, which firms are in a position to “afford” these costs? As competition forces the economic rate of return to zero and only those firms with positive economic profit can afford discrimination, the firms in a position to act on their prejudice are those in monopolistic product markets enjoying monopolistic rates of return. This relatively straightforward logic is subject to a rather long series of important caveats. Owners with prejudice may gain utility from discrimination and may be willing to pay for it in any market structure not just those associated with positive economic profit. Indeed, they may experience economic losses but value the utility they receive sufficiently to compensate for those losses. Yet, the more common story is one in which the managers who run the firm have prejudice, and owners, separated from operations of the firm, care only about profits. In this case, Becker’s prediction depends on sufficiently severe agency problems that managers’ discriminatory behavior cannot be controlled by owners or eliminated through the corporate takeover mechanism. In addition, the exact