Insider Power, Wage Discrimination and Fairness

Abstract: The exercise of insider power is frequently considered as a major cause of involuntary unemployment. We show that under standard assumptions - insiders are selfish and they need not fear the loss of their job - insider power does not guarantee unemployment but the introduction of a market clearing two-tier system. Yet, while insider power is a common phenomen two-tier systems are rarely observed. We show that if outsiders exhibit a preference for fairness the presence of insider powergives rise to an efficiency wage effect which may prevent the introduction of market clearing two-tier systems. It is, thus, the combination of insider power and workers' preferences for fairness which causes unemployment.;