Question

Suppose that in a given labor market, green-eyed people are discriminated against (relative to brown-eyed people). However, both of these types of workers are equally productive, so the VMP_L curves for the two groups are identical. Because of this discrimination, suppose that the market wage for green-eyed people is W_g= $20, and the market wage for brown-eyed people is W_b= $25.

Which Firm has Higher profits?

Answer 1

In the given labor market, the employment providers are prejudiced towards the brown-eyed people even though the productivity of the latter is same as that of the green-eyed people.

This is leading to the difference in market wages where market wage for green-eyed people is W_g= $20, and the market wage for brown-eyed people is W_b= $25.

So there exists a discrimination coefficient (d) which determines the employment and profitability of the firms.

Now for a firm where d = 0, employer will hire those workers that are available cheaply i.e. brown-eyed people.

For a second firm where d > 0, the employer will not hire the cheapest because he is prejudiced towards brown-eyed.

the effective wage rate of brown-eyed = existing wage rate ( 1 + d)

Thus the first firm will have higher profits.