Monopsony and Discrimination in Labor Market in the Solow-Stiglitz Two-Group Neoclassical Growth Model
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May 25, 2020
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Abstract
The purpose of this study is to deal with economic growth with labor market monopsony. The economy is composed of one sector (like in the Solow model) and two groups of households (like in the Stiglitz model). The sector uses capital and labor as inputs. Capital and output markets are perfectly competitive. The population is classified into two - discriminatory and discriminated - groups. Labor market for the discriminatory group is perfectly competitive, whereas it is characterized by monopsony for the latter group. We model the behavior of the household with the concept of disposable income and utility function developed by Zhang (2013, 2017). The model endogenously determines the prot of the rm which is equally distributed among the discriminatory population. We build the model and provide a computational procedure to quantify the response of the model economy in a comparative dynamic setting. We also compare the model outcomes with a labor market under perfect competition and under monopsony. We show that monopsony harms not only national economic growth but also the discriminatory household in the long term.
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Zhang, W.-B. (2020) “Monopsony and Discrimination in Labor Market in the Solow-Stiglitz Two-Group Neoclassical Growth Model”, World Journal of Applied Economics, 6(1), pp. 1-19. doi: 10.22440/wjae.6.1.1.
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References
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Arrow, K. J., & Debreu, G. (1954). Existence of an Equilibrium for a Competitive Economy. Econometrica, 22, 265-290. doi:10.2307/1907353
Arrow, K. J., & Hahn, F. H. (1971). General Competitive Analysis. Holden-Day, Inc.
Ashenfelter, O. C., Farber, H., & Ransom, M. R. (2010). Labor Market Monopsony. Journal of Labor Economics, 28, 203-210. doi:10.1086/653654
Atkinson, S. E., & Kerkvliet, J. (1989). Dual Measures of Monopoly and Monopsony Power: An Application to Regulated Electric Utilities. The Review of Economics and Statistics, 71, 250-57. doi:10.2307/1926970
Azariadis, C. (1993). Intertemporal Macroeconomics. Blackwell.
Bachmann, R., & Frings, H. (2017). Monopsonistic Competition, Low-wage Labour Markets, and Minimum Wages – An Empirical Analysis. Applied Economics, 49, 5268-5286. doi:10.1080/00036846.2017.1302069
Barr, T., & Roy, U. (2008). The Effect of Labor Market Monopsony on Economic Growth. Journal of Macroeconomics, 30, 1446-67. doi:10.1016/j.jmacro.2008.05.001
Barro, R. J., & Sala-i-Martin, X. (1995). Economic Growth. New York: McGraw-Hill, Inc.
Behrens, K., & Murata, Y. (2007). General Equilibrium Models of Monopolistic Competition: A New Approach. Journal of Economic Theory, 136, 776-787. doi:10.1016/j.jet.2006.10.001
Behrens, K., & Murata, Y. (2009). City Size and the Henry George Theorem under Monopolistic Competition. Journal of Urban Economics, 65, 228-235. doi:10.1016/j.jue.2008.12.004
Ben-David, D., & Loewy, M. B. (2003). Trade and the Neoclassical Growth Model. Journal of Economic Integration, 18, 1-16.
Bhaskar, V., Manning, A., & To, T. (2002). Oligopsony and Monopsonistic Competition in Labor Markets. Journal of Economic Perspectives, 16, 155-74. doi:10.1257/0895330027300
Black, D. A. (1995). Discrimination in an Equilibrium Search Model. Journal of Labor Economics, 13, 309-34. doi:10.1086/298376
Boal, W. M., & Ransom, M. R. (1997). Monopsony in the Labor Market. Journal of Economic Literature, 35, 86-112.
Booth, A. L. (2014). Wage Determination and Imperfect Competition. Labour Economics, 30, 53-58. doi:10.1016/j.labeco.2014.06.010
Bowlus, A. J. (1997). A Search Interpretation of Male-Female Wage Differentials. Journal of Labor Economics, 15, 625-57. doi:10.1086/209840
Brakman, S., & Heijdra, B. J. (2004). The Monopolistic Competition Revolution in Retrospect. Cambridge University Press.
Burmeister, E., & Dobell, R. (1970). Mathematical Theories of Economic Growth. Collier Macmillan Publishers.
Chang, W. W. (2012). Monopolistic Competition and Product Diversity: Review and Extension. Journal of Economic Surveys, 26, 879-910. doi:10.1111/j.1467-6419.2011.00682.x
Dana, R.-A., Florenzano, M., Van, C. L., & Levy, D. (1989). Production Prices and General Equilibrium Prices: A Long-run Property of a Leontief Economy. Journal of Mathematical Economics, 18, 263-80. doi:10.1016/0304-4068(89)90024-4
Debreu, G. (1959). Theory of Value: An Axiomatic Analysis of Economic Equilibrium. Yale University Press.
Dixit, A. K., & Stiglitz, J. E. (1977). Monopolistic Competition and Optimum Product Diversity. The American Economic Review, 67, 297-308.
Fraumeni, B. (1997). The Measurement of Depreciation in the US National Income and Product Accounts. Survey of Current Business-United States Department of Commerce, 77, 7-23.
Hall, B. H. (2007). Measuring the Returns to R&D: The Depreciation Problem. Working Paper, National Bureau of Economic Research. doi:10.3386/w13473
Helsley, R. W., & Strange, W. C. (1990). Matching and Agglomeration Economies in a System of Cities. Regional Science and Urban Economics, 20, 189-212. doi:10.1016/0166-0462(90)90004-M
Hirsch, B. T., & Schumacher, E. J. (1995). Monopsony Power and Relative Wages in the Labor Market for Nurses. Journal of Health Economics, 14, 443-76. doi:10.1016/0167-6296(95)00013-8
Hirsch, B., Jahn, E. J., & Schnabel, C. (2018). Do Employers Have More Monopsony Power in Slack Labor Markets? ILR Review, 71, 676-704. doi:10.1177/0019793917720383
Impicciatore, G., Panaccione, L., & Ruscitti, F. (2012). Walras' Theory of Capital Formation: An Intertemporal Equilibrium Reformulation. Journal of Economics, 106, 99-118. doi:10.1007/s00712-011-0231-y
Jensen, B. S., & Larsen, M. E. (2005). General Equilibrium Dynamics of Multi-sector Growth Models. Journal of Economics, 86, 17-56. doi:10.1007/BF03051799
Krugman, P. (1979). A Model of Innovation, Technology Transfer, and the World Distribution of Income. Journal of Political Economy, 87, 253-266. doi:10.1086/260755
Manning, A. (2003). Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton University Press.
Manning, A. (2006). A Generalised Model of Monopsony. The Economic Journal, 116, 84-100. doi:10.1111/j.1468-0297.2006.01048.x
Manning, A. (2010). The Plant Size-place Effect: Agglomeration and Monopsony in Labour Markets. Journal of Economic Geography, 10, 717-44. doi:10.1093/jeg/lbp042
Mas-Colell, A., Whinston, M. D., & Green, J. R. (1995). Microeconomic Theory (Vol. 1). Oxford University Press.
Miles, D., & Scott, A. (2005). Macroeconomics: Understanding the Wealth of Nations. John Wiley & Sons, Ltd.
Montesano, A. (2008). A Restatement of Walras' Theories of Capitalisation and Money. History of Economics Review, 47, 86-109. doi:10.1080/18386318.2008.11682122
Muehlemann, S., Ryan, P., & Wolter, S. C. (2013). Monopsony Power, Pay Structure, and Training. ILR Review, 66, 1097-114. doi:10.1177/001979391306600504
Nadiri, M. I., & Prucha, I. R. (1996). Estimation of the Depreciation Rate of Physical and R&D Capital in the U.S. Total Manufacturing Sector. Economic Inquiry, 34, 43-56. doi:10.1111/j.1465-7295.1996.tb01363.x
Nikaido, H. (1975). Monopolistic Competition and Effective Demand. New Jersey: Princeton University Press.
Parenti, M., Ushchev, P., & Thisse, J.-F. (2017). Toward a Theory of Monopolistic Competition. Journal of Economic Theory, 167, 86-115. doi:10.1016/j.jet.2016.10.005
Pasinetti, L. L. (1962). Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth. The Review of Economic Studies, 29, 267-79. doi:10.2307/2296303
Prokop, J., & Karbowski, A. (2018). R&D Spillovers and Cartelization of Industries with Differentiated Products. Journal of International Studies, 11, 44-56. doi:10.14254/2071-8330.2018/11-3/4
Robinson, J. (1933). The Economics of Imperfect Competition. MacMillan.
Romer, P. M. (1990). Endogenous Technological Change. Journal of Political Economy, 98, S71--S102. doi:10.1086/261725
Salop, S. C. (1979). Monopolistic Competition with Outside Goods. Bell Journal of Economics, 10, 141-56.
Salvadori, N. (1991). Post-Keynesian Theory of Distribution in the Long-run. In E. J. Nell, & W. Semmler (Eds.), Nicholas Kaldor and Mainstream Economics - Confrontation or Convergence? (pp. 164-89). Macmillan.
Shapiro, C. (1989). Theories of Oligopoly Behavior. In R. Schmalensee, & R. D. Willig (Eds.), Handbook of industrial organization (Vol. 1, pp. 329-414). North-Holland.
Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70, 65-94. doi:10.2307/1884513
Stiglitz, J. E. (1967). A Two-Sector Two Class Model of Economic Growth. The Review of Economic Studies, 34, 227-38. doi:10.2307/2296811
Thornton, R. J. (2004). Retrospectives: How Joan Robinson and B. L. Hallward Named Monopsony. Journal of Economic Perspectives, 18, 257-61. doi:10.1257/0895330041371240
Uzawa, H. (1961). On a Two-Sector Model of Economic Growth. The Review of Economic Studies, 29, 40-47. doi:10.2307/2296180
Walras, L. (1874). Elements of Pure Economics. (W. Jaffé, Trans. 1954), Allen and Unwin.
Webber, D. A. (2016). Firm-Level Monopsony and the Gender Pay Gap. Industrial Relations: A Journal of Economy and Society, 55, 323-45. doi:10.1111/irel.12142
Zhang, W.-B. (1993). A Woman's Labor Participation and Economic Growth: Creativity, Knowledge Utilization and Family Preference. Economics Letters, 42, 105-10. doi:10.1016/0165-1765(93)90181-B
Zhang, W.-B. (2005). Economic Growth Theory. Ashgate.
Zhang, W.-B. (2008). International Trade Theory: Capital, Knowledge, Economic Structure, Money, and Prices over Time. Springer. doi:10.1007/978-3-540-78265-0
Zhang, W.-B. (2013). A Synthesis of the Uzawa-Lucas Model with the Walrasian-General-Equilibrium and Neoclassical-Growth Theories. Economic Annals, 58, 7-38. doi:10.2298/EKA1399007Z
Zhang, W.-B. (2017). Social Status and Inequality in an Integrated Walrasian-General Equilibrium and Neoclassical-Growth Theory. Journal of Economic Development, 42, 95-118.
Zhang, W.-B. (2018). An Integration of Solow's Growth and Dixit-Stiglitz's Monopolistic Competition Models. SPOUDAI-Journal of Economics and Business, 68, 3-19.
Arrow, K. J. (1974). General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice. The American Economic Review, 64, 253-72.
Arrow, K. J., & Debreu, G. (1954). Existence of an Equilibrium for a Competitive Economy. Econometrica, 22, 265-290. doi:10.2307/1907353
Arrow, K. J., & Hahn, F. H. (1971). General Competitive Analysis. Holden-Day, Inc.
Ashenfelter, O. C., Farber, H., & Ransom, M. R. (2010). Labor Market Monopsony. Journal of Labor Economics, 28, 203-210. doi:10.1086/653654
Atkinson, S. E., & Kerkvliet, J. (1989). Dual Measures of Monopoly and Monopsony Power: An Application to Regulated Electric Utilities. The Review of Economics and Statistics, 71, 250-57. doi:10.2307/1926970
Azariadis, C. (1993). Intertemporal Macroeconomics. Blackwell.
Bachmann, R., & Frings, H. (2017). Monopsonistic Competition, Low-wage Labour Markets, and Minimum Wages – An Empirical Analysis. Applied Economics, 49, 5268-5286. doi:10.1080/00036846.2017.1302069
Barr, T., & Roy, U. (2008). The Effect of Labor Market Monopsony on Economic Growth. Journal of Macroeconomics, 30, 1446-67. doi:10.1016/j.jmacro.2008.05.001
Barro, R. J., & Sala-i-Martin, X. (1995). Economic Growth. New York: McGraw-Hill, Inc.
Behrens, K., & Murata, Y. (2007). General Equilibrium Models of Monopolistic Competition: A New Approach. Journal of Economic Theory, 136, 776-787. doi:10.1016/j.jet.2006.10.001
Behrens, K., & Murata, Y. (2009). City Size and the Henry George Theorem under Monopolistic Competition. Journal of Urban Economics, 65, 228-235. doi:10.1016/j.jue.2008.12.004
Ben-David, D., & Loewy, M. B. (2003). Trade and the Neoclassical Growth Model. Journal of Economic Integration, 18, 1-16.
Bhaskar, V., Manning, A., & To, T. (2002). Oligopsony and Monopsonistic Competition in Labor Markets. Journal of Economic Perspectives, 16, 155-74. doi:10.1257/0895330027300
Black, D. A. (1995). Discrimination in an Equilibrium Search Model. Journal of Labor Economics, 13, 309-34. doi:10.1086/298376
Boal, W. M., & Ransom, M. R. (1997). Monopsony in the Labor Market. Journal of Economic Literature, 35, 86-112.
Booth, A. L. (2014). Wage Determination and Imperfect Competition. Labour Economics, 30, 53-58. doi:10.1016/j.labeco.2014.06.010
Bowlus, A. J. (1997). A Search Interpretation of Male-Female Wage Differentials. Journal of Labor Economics, 15, 625-57. doi:10.1086/209840
Brakman, S., & Heijdra, B. J. (2004). The Monopolistic Competition Revolution in Retrospect. Cambridge University Press.
Burmeister, E., & Dobell, R. (1970). Mathematical Theories of Economic Growth. Collier Macmillan Publishers.
Chang, W. W. (2012). Monopolistic Competition and Product Diversity: Review and Extension. Journal of Economic Surveys, 26, 879-910. doi:10.1111/j.1467-6419.2011.00682.x
Dana, R.-A., Florenzano, M., Van, C. L., & Levy, D. (1989). Production Prices and General Equilibrium Prices: A Long-run Property of a Leontief Economy. Journal of Mathematical Economics, 18, 263-80. doi:10.1016/0304-4068(89)90024-4
Debreu, G. (1959). Theory of Value: An Axiomatic Analysis of Economic Equilibrium. Yale University Press.
Dixit, A. K., & Stiglitz, J. E. (1977). Monopolistic Competition and Optimum Product Diversity. The American Economic Review, 67, 297-308.
Fraumeni, B. (1997). The Measurement of Depreciation in the US National Income and Product Accounts. Survey of Current Business-United States Department of Commerce, 77, 7-23.
Hall, B. H. (2007). Measuring the Returns to R&D: The Depreciation Problem. Working Paper, National Bureau of Economic Research. doi:10.3386/w13473
Helsley, R. W., & Strange, W. C. (1990). Matching and Agglomeration Economies in a System of Cities. Regional Science and Urban Economics, 20, 189-212. doi:10.1016/0166-0462(90)90004-M
Hirsch, B. T., & Schumacher, E. J. (1995). Monopsony Power and Relative Wages in the Labor Market for Nurses. Journal of Health Economics, 14, 443-76. doi:10.1016/0167-6296(95)00013-8
Hirsch, B., Jahn, E. J., & Schnabel, C. (2018). Do Employers Have More Monopsony Power in Slack Labor Markets? ILR Review, 71, 676-704. doi:10.1177/0019793917720383
Impicciatore, G., Panaccione, L., & Ruscitti, F. (2012). Walras' Theory of Capital Formation: An Intertemporal Equilibrium Reformulation. Journal of Economics, 106, 99-118. doi:10.1007/s00712-011-0231-y
Jensen, B. S., & Larsen, M. E. (2005). General Equilibrium Dynamics of Multi-sector Growth Models. Journal of Economics, 86, 17-56. doi:10.1007/BF03051799
Krugman, P. (1979). A Model of Innovation, Technology Transfer, and the World Distribution of Income. Journal of Political Economy, 87, 253-266. doi:10.1086/260755
Manning, A. (2003). Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton University Press.
Manning, A. (2006). A Generalised Model of Monopsony. The Economic Journal, 116, 84-100. doi:10.1111/j.1468-0297.2006.01048.x
Manning, A. (2010). The Plant Size-place Effect: Agglomeration and Monopsony in Labour Markets. Journal of Economic Geography, 10, 717-44. doi:10.1093/jeg/lbp042
Mas-Colell, A., Whinston, M. D., & Green, J. R. (1995). Microeconomic Theory (Vol. 1). Oxford University Press.
Miles, D., & Scott, A. (2005). Macroeconomics: Understanding the Wealth of Nations. John Wiley & Sons, Ltd.
Montesano, A. (2008). A Restatement of Walras' Theories of Capitalisation and Money. History of Economics Review, 47, 86-109. doi:10.1080/18386318.2008.11682122
Muehlemann, S., Ryan, P., & Wolter, S. C. (2013). Monopsony Power, Pay Structure, and Training. ILR Review, 66, 1097-114. doi:10.1177/001979391306600504
Nadiri, M. I., & Prucha, I. R. (1996). Estimation of the Depreciation Rate of Physical and R&D Capital in the U.S. Total Manufacturing Sector. Economic Inquiry, 34, 43-56. doi:10.1111/j.1465-7295.1996.tb01363.x
Nikaido, H. (1975). Monopolistic Competition and Effective Demand. New Jersey: Princeton University Press.
Parenti, M., Ushchev, P., & Thisse, J.-F. (2017). Toward a Theory of Monopolistic Competition. Journal of Economic Theory, 167, 86-115. doi:10.1016/j.jet.2016.10.005
Pasinetti, L. L. (1962). Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth. The Review of Economic Studies, 29, 267-79. doi:10.2307/2296303
Prokop, J., & Karbowski, A. (2018). R&D Spillovers and Cartelization of Industries with Differentiated Products. Journal of International Studies, 11, 44-56. doi:10.14254/2071-8330.2018/11-3/4
Robinson, J. (1933). The Economics of Imperfect Competition. MacMillan.
Romer, P. M. (1990). Endogenous Technological Change. Journal of Political Economy, 98, S71--S102. doi:10.1086/261725
Salop, S. C. (1979). Monopolistic Competition with Outside Goods. Bell Journal of Economics, 10, 141-56.
Salvadori, N. (1991). Post-Keynesian Theory of Distribution in the Long-run. In E. J. Nell, & W. Semmler (Eds.), Nicholas Kaldor and Mainstream Economics - Confrontation or Convergence? (pp. 164-89). Macmillan.
Shapiro, C. (1989). Theories of Oligopoly Behavior. In R. Schmalensee, & R. D. Willig (Eds.), Handbook of industrial organization (Vol. 1, pp. 329-414). North-Holland.
Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70, 65-94. doi:10.2307/1884513
Stiglitz, J. E. (1967). A Two-Sector Two Class Model of Economic Growth. The Review of Economic Studies, 34, 227-38. doi:10.2307/2296811
Thornton, R. J. (2004). Retrospectives: How Joan Robinson and B. L. Hallward Named Monopsony. Journal of Economic Perspectives, 18, 257-61. doi:10.1257/0895330041371240
Uzawa, H. (1961). On a Two-Sector Model of Economic Growth. The Review of Economic Studies, 29, 40-47. doi:10.2307/2296180
Walras, L. (1874). Elements of Pure Economics. (W. Jaffé, Trans. 1954), Allen and Unwin.
Webber, D. A. (2016). Firm-Level Monopsony and the Gender Pay Gap. Industrial Relations: A Journal of Economy and Society, 55, 323-45. doi:10.1111/irel.12142
Zhang, W.-B. (1993). A Woman's Labor Participation and Economic Growth: Creativity, Knowledge Utilization and Family Preference. Economics Letters, 42, 105-10. doi:10.1016/0165-1765(93)90181-B
Zhang, W.-B. (2005). Economic Growth Theory. Ashgate.
Zhang, W.-B. (2008). International Trade Theory: Capital, Knowledge, Economic Structure, Money, and Prices over Time. Springer. doi:10.1007/978-3-540-78265-0
Zhang, W.-B. (2013). A Synthesis of the Uzawa-Lucas Model with the Walrasian-General-Equilibrium and Neoclassical-Growth Theories. Economic Annals, 58, 7-38. doi:10.2298/EKA1399007Z
Zhang, W.-B. (2017). Social Status and Inequality in an Integrated Walrasian-General Equilibrium and Neoclassical-Growth Theory. Journal of Economic Development, 42, 95-118.
Zhang, W.-B. (2018). An Integration of Solow's Growth and Dixit-Stiglitz's Monopolistic Competition Models. SPOUDAI-Journal of Economics and Business, 68, 3-19.