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Research Summary

How Job Search Limitations Worsen Wage Inequality

Annabel Stattelman ScanlanSeptember 19, 2023
Source: The Review of Black Political Economy Title: Discrimination and Monopsony Power Author(s): Mark Stelzner and Kate Bahn Original Publication Date: 2021 Read Full Research Article

Although inflation may be slowing in the United States, two years of price increases have ensured that the majority of workers are unhappy with their pay. Finding a new job is one reliable way to increase income: between April 2021 and March 2022, 60 percent of workers who changed jobs received higher earnings than the previous year after adjusting for inflation. Switching employers is not always simple, however, and differences in job mobility between demographic groups have important implications for reducing wage inequality.

In this theoretical paper, economists Mark Stelzner and Kate Bahn find that a worker’s ability to search for a new job depends on a number of measurable factors, and these factors have implications for gender and racial pay inequality. They estimate an expanded job search model that considers (a) employers’ monopsony power, meaning the extent that employers can offer low wages if they believe workers won’t be able to find other employment opportunities; (b) whether workers have enough money saved to help them in a job transition; and (c) life constraints like child care responsibilities that may limit the location and types of jobs a worker can accept.

Key Findings:

A worker’s ability to search for a new job depends on:

  • Wealth, which can cover unpaid time off and periods of unemployment: Workers may need to take unpaid time off to go to interviews, there may be a gap between paychecks as they transition between jobs, and if there are any complications, the worker may face a longer period of unemployment. For these reasons, looking for a new job is riskier for those with less wealth.
    • In the first quarter of 2023, the average wealth of a Black family in the United States was 7% less than the average white family, and the average wealth of Latino families was 76.5% less than for white families. This extreme wealth inequality ensures that members of white families have much more extensive safety nets than members of Black and Latino families, meaning they can afford to take the risk of looking for a new job.
  • Search areas limited by societal expectations: As a result of social norms, women are given greater household and caregiving responsibilities. These household obligations may restrict women from applying to jobs with longer commutes or moving in search of better pay, limiting the area in which they search for a new job. This smaller area gives employers greater monopsony power over women because there are fewer total employers in their job search.
  • Labor market power of employers compared to workers: When employers have an uneven share of labor market power, they can offer lower wages and workers have fewer opportunities to switch jobs. If there are systemic differences between how easy it is for different groups to find new employers, their current employers can pay them less without causing them to quit.

Incorporating these factors in the measurement of wage gaps reveals:

  • Differences in education and skill do not explain lower wages for Black and Hispanic workers: Wage inequality between workers of different genders, races, and ethnicities persist even when researchers compare workers with similar education and skill levels.
  • Why intersectional wage gaps are larger than the sum of racial, ethnic, and gender wage gaps: Studies of income inequality have shown that the difference in wages between non-white women and white men is greater than the combined difference between white men and women and Black and white men. Stelzner and Bahn’s model shows that having a smaller number of firms competing for a worker’s labor affects the worker’s willingness to change jobs more when they have less wealth and vice versa.
  • Variation in wages over time: Changes in worker power, cultural shifts in gender roles, and fluctuations in wealth outcomes explain how wage gaps have evolved in recent history. For example, the female-male wage gap has remained unchanged since the 1990s. Using their new model, the researchers find that decreasing worker power has neutralized any positive effect of changing social expectations of women’s household responsibilities over the same time period.

Policy and practice implications

The authors identify the following implications for research and policy:

  • Policymakers should pursue programs thatreduce wealth inequality. Baby bonds, for example, use a new progressive tax to fund government bonds given to children’s families. Their value increases based on a family’s financial need, with an upper limit of $60,000. If implemented, these bonds would make it easier for families with less wealth to look for higher-paying jobs.
  • The passage of morefamily economic security policies, including paid sick leave and affordable child care, would decrease monopsony power over women by lifting some of the geographic constraints on job searches.
  • Legal support to engage in collective action can provide workers with greater power navigating the labor market. Enforcement agencies should have resources available to uphold existing protections for union organizing and other labor rights. State legislators should repeal right-to-work laws to allow employees to engage in collective action and reduce employers’ monopsony power. In addition, federal policymakers should pass laws that promote sectoral bargaining or the ability of one or more unions to negotiate for workers in all industries.
  • Policymakers can prevent workers from being paid less than their value by raising the minimum wage and passing antitrust legislation. The real minimum wage in the United States has declined significantly since the 1960s, and firm concentration has increased over the same timeframe. By making it more difficult for employers to set discriminatory wages, legislators can constrain employers’ monopsony power.
  • The government should take an active role incollecting and analyzing company-level wage data to identify and resolve race- and gender-based differences in wages within employers to enforce laws that prohibit compensation discrimination based on race, ethnicity, and gender.
  • Researchers who seek to measure wage discrimination should use this model for a complete picture of pay inequity. The inclusion of wealth, geographic search area, and monopsony power explain a portion of gender and racial wage gaps, which have important implications for policy.

Job search constraints additionally burden women and people of color by making it more difficult for them to search for jobs with higher wages. Policymakers can create a fair labor market that reduces wage inequality by supporting workers’ rights to engage in collective action, prioritizing family economic security and wealth equality, and limiting employers’ ability to set discriminatory wages.

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