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Discrimination in the Equilibrium Search Model with Wage-Tenure Contracts

Author

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  • FANG Zheng

    (Division of Economics, Nanyang Technological University, Singapore, 639798)

  • Chris SAKELLARIOU

    (Division of Economics, Nanyang Technological University, Singapore, 639798)

Abstract

We extend the Burdett and Coles (2003) search model with wage-tenure contracts to two types of workers and firms and derive the equilibrium earnings distributions for both types of workers, by means of which we succeed in predicting many stylized facts found in empirics. For example, we find that at the same wage level, majority workers almost always experience a faster wage increase than the minority workers; minority workers have a higher unemployment rate; discriminating firms make lower profit than non-discriminating firms and offers to minority workers by non-discriminating firms are consistently superior to those provided by discriminating firms etc. Besides, we find a similar result to the classical discrimination theory that the average wage of the majority workers, though higher in most cases, can be smaller than their counterpart’s wage when the fraction of discriminating firms is small and the degree of recruiting discrimination and disutility are mild. We also show that in a special case of CRRA utility function with the coefficient of relative risk aversion approaching infinity, our model degenerates to Bowlus and Eckstein (2002).

Suggested Citation

  • FANG Zheng & Chris SAKELLARIOU, 2010. "Discrimination in the Equilibrium Search Model with Wage-Tenure Contracts," Economic Growth Centre Working Paper Series 1004, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:1004
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    References listed on IDEAS

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    Cited by:

    1. Fang, Zheng & Sakellariou, Chris, 2015. "Discrimination or Unobserved Differences in Characteristics?-An Empirical Study on Wage Inequality," MPRA Paper 68568, University Library of Munich, Germany.

    More about this item

    Keywords

    discrimination; wage gap; equilibrium search; wage-tenure;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing

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