Monopsony and Discrimination in Labor Market in the Solow-Stiglitz Two-Group Neoclassical Growth Model

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 (2013Zhang ( , 2017. The model endogenously determines the profit of the firm 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.