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Strategic Gains from Labor Market Discrimination

Johan Lagerlof ()

No 16-03, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: According to a classical argument, an employer handicaps herself if she bases hiring decisions on factors unrelated to productivity; therefore, discrimination is undermined by competition. The present paper, in contrast, argues that being discriminatory can be a commitment device that helps an employer and its rivals to partially segment the labor market, which leads to lower wages and higher profits. Discrimination can thus be an endogenous response to (changes in) competition. Indeed, the relationship between discrimination and competition can be non-monotone. Moreover, a ban on wage discrimination (which may be feasible, as such discrimination is easily detectable) may lead to discrimination in hiring (which cannot be banned because it is harder to observe).

Keywords: discrimination; competition; strategic interaction; market segmentation (search for similar items in EconPapers)
JEL-codes: J71 D43 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2016-02-12
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