30/11/2008
Corporate Social Responsibility and Wage Discrimination in Unionized Oligopoly

Corporate Social Responsibility and Wage Discrimination in Unionized Oligopoly

The European labour markets are characterized by the existence of trade unions with extensive coverage whereas wage contracts are typically determined through decentralized firm-union bargaining. On the other hand, as it particularly refers to migrant and ethnic minority groups, equally-skilled workers often face lower reservation wages. We argue that these facts may lead unions to opt for discriminatory wage contracts across groups of employees.

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The European economy has recently experienced a rapid growth of interest in the exertion and the implications of corporate social responsibility (csr) in the labour market. Perhaps because, according to the public stereotyping, workers are considered to be among the key stakeholders in any firm and there is evidence on the increasing importance which consumers attach to companies who demonstrate their social responsibility by practically recognizing that. At the same time the higher participation of ethnic minorities, the elderly, and people with disabilities in the labour market, challenge firms to adopt diversity and anti- discriminatory schemes, and an increasing number of firms are indeed doing so. Not (necessarily) for ethical and legal reasons, but rather for the economic benefits which such policies are expected to deliver.

Turning to the institutions, the EU in fact seems to be ahead of those trends by issuing the Anti-discrimination Employment Directive (2000/78/EC) establishing the principle of diversity and non-discrimination. While, according to the resolutions of the World Summit on Sustainable Development (2002), a “partnership between firms, government, and civilians” has considered to be the key to progress on international sustainable development. Firms have therefore been assigned a two-fold role in enabling the society to reap the benefits of globalization: To exert (corporate) social responsibility regarding ethnic or other minorities in the labour market and also report that responsibility.

It thus seems that exerting (and informing the public about) csr in the labour market, as well as elsewhere, should today be amongst the firms’ priorities. While, apart from setting up minimum legal standards for the minorities, the role of policy makers should in turn be to raise the public awareness on the benefits which such a firms’ proactive approach can bring to the society. The scope of this paper is to explore along the previous lines equality versus discrimination in the labour market, with a view to assess the factors and policies addressing either instance. In particular, given the EU-Anti-discrimination Employment Directive, our focus is on aspects of pay discrimination. To this end the empirical evidence provides a strong indication that differential treatment, particularly regarding ethnic minority groups and economic migrants, is (still) significant in Europe and it might be related with other than productivity factors.

The theoretical foundations of labour market discrimination go back to the seminal papers of G. Becker, and K. Arrow. In summary, according to Becker’s (1957) approach discrimination arises from “a taste for discrimination” against minority workers on the part of employers; in Arrow’s (1972) “statistical discrimination” hypothesis on the other hand discrimination results from the employers’ uncertainty about the individual quality of workers which is biased against minority workers.  

In our approach, while we maintain employer’s uncertainty (yet unbiased) about the relative individual quality of workers, we clearly abstain from any taste to discriminate on the part of anyone and against anybody. In a context of union-oligopoly decentralized bargaining we propose that wage discrimination among equally-skilled workers may endogenously emerge as long as workers can be ex ante grouped according to different opportunity cost(s) of employment (e.g., reservation wages). On the other hand nonetheless consumers may ceteris paribus attach higher valuation to the product of a firm which exerts csr by not discriminating in pay against anyone of its employees; of course, so long as they are informed about that. Hence, though wage discrimination seems to be the unions’ optimal choice whenever consumers are ignorant and/or they do not care about non-discrimination in wages, firms may independently achieve higher profits by strategically opting for non-discrimination in wages and advertising it as an exertion of csr. If, by doing so, they can vertically differentiate their product enough to compensate for both the csr- advertisement costs and the higher unit costs of production which non-discrimination relative to discrimination entails. Such an option of strategic csr on the part of firms may in turn prove to be compatible with the unions’ best interest, as well, if the consumers’ valuation of non- discrimination is sufficiently high. If not, we subsequently propose that in order to deter wage discrimination a policy maker should instead of firms undertake csr-advertisement in the event of non-discrimination in wages. Yet, such an antidiscrimination policy would always entail a net loss in social welfare. 

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