Theories of “discretionary power” suggest that market power provides employers the opportunity to pursue objectives other than profit-maximizing. Such power extends employers the latitude to discriminate and pass costs on to consumers since a lack of competition severely limits consumer’s choice of alternative products.
A crucial assumption of this theory is that wage rates of the suspect group are determined in their labor market and discrimination would result in a decline in the demand for labor for the underrepresented group. Thus discrimination manifests itself in decreased employment and/or decreased wages, depending on the elasticity of labor supply of the suspect group. Extensive research has tested the “discretionary power hypothesis” (DPH) for wage discrimination.
Peoples, as well as employment discrimination with mixed results. Some found evidence to support the hypothesis. Models which suggest that discrimination would result exclusively in the underrepresentation of minorities assume an infinitely elastic industry labor supply curve at a single prevailing wage rate for the suspect group. In this case, the reduction in labor demand from discrimination has only an exclusive employment effect.
Underlying this infinitely elastic supply schedule must be the assumption that labor is not unique to the industry, and there exists a high degree of substitutability. While this assumption is suspect, it is equally suspect to assume that the labor supply is perfectly inelastic and that wage discrimination accounts for all discrimination in the industry. In fact, labor market theory would suggest that the effect of discrimination in an industry would not be constant across occupations. In fact, labor market theory would suggest that the effect of discrimination in an industry would not be constant across occupations.
The different skill levels required for occupations and the degree of substitution of workers within and between industries would dictate that high-skilled occupations with difficult to replace workers would possess a more inelastic labor supply schedule, and thus experience a large wage effect and minimal employment effects.