Labor Market Imperfections


“So distribution should undo excess, and each man have enough.”
[King Lear, Act 4, Scene 1] – WILLIAM SHAKESPEARE


As a highly skeptical person, I’ve always doubted equality and opportunity in the labor market, even (or maybe especially) in a country like America. In fact, growing up in “the land of the free” or “the land of dreams”, I’m surprised at how much inequality I see in the workplace and the job market. My parents actually immigrated to America for college and stayed afterwards, and they’re doing relatively well having started with nothing; however, I see many other people failing to climb the ladder of the job market, and I wonder why. The unemployment rate for African Americans in the US is 2x that of Caucasians/Asians, and the unemployment rate for Hispanics is 1.5x that of Caucasians/Asians. And, though this sin’t as significant a difference, while the unemployment rate for men in the US is 4.0%, the unemployment rate for women is 4.6%. This poses a major problem that needs to be addressed!! Further, even after people get jobs, the median salary for Asians in 2017 was nearly 2x that of both African Americans and Hispanics. Now, this problem probably has something to do with the jobs that each group tends to hold, but it still presents a shocking contrast between groups and is an issue that needs to come to light.

Through this project, I want to try to find solutions to mitigate American inequality in the economy. Reducing inequality should also drastically improve economic performance in general. This is important to me because I will eventually enter the labor market, and I don’t want to see the discrimination that I see today. Even if I am of a relatively advantaged group (Asian), I still find it important to level the playing field for everyone. I want to promote sustained, inclusive and sustainable economic growth by ensuring full and productive employment and decent work for all.

The Problem:

The problem is that inequality and certain aspects of the job market today inhibit economic growth and prosperity, both for companies and for nations or the world. In order to maximize efficiency and productivity, the labor market should provide equal opportunity to all groups; thus, everyone benefits. Inequality in the labor market proves a detriment to everyone, so it’s a problem that everyone should want to address.

Game Theory Model:

The two players in the game of employment are the government and individual companies. Columns represent strategies for the government while rows represent strategies for individual companies.

Payoffs are assigned based on profitability and benefit to the economy.
If both companies and the government do nothing (Strategy A), then profits and the economy remain at 100% of what they are now.
Otherwise, those values/percentages change according to my predictions.
  • Row A: Do nothing.
  • Row B: Hire blind of race, gender, or background.
  • Row C: Institute affirmative hiring – purposely hire those of minority or traditionally disadvantaged backgrounds.
  • Col A: Do nothing.
  • Col B: Pass legislation mandating equal treatment in the workplace.
  • Col C: Pass legislation encouraging women to work.
  • Col D: Pass legislation encouraging equality in the hiring process.
  • Col E: Give subsidies for hiring of minorities or disadvantaged people.

The Solution:

Pareto Optimal Model

The Pareto Optimal solution (e.g. the solution that maximizes the payoffs/benefits for both parties in a game theoretic model) to this problem as modeled above is either (B, B), (B, E), or some combination of (B, mix B/E). The points on the graph furthest up and to the right yields the highest payoffs (the best situations) for companies and for the government. A high x means a high benefit for companies, and a high y means a high benefit for the government or the economy of a nation in general.

Nash Equilibrium Diagram

The Nash Equilibrium solution (e.g. the solution in which neither player has any incentive to change their strategy) to this problem is (B, B). We say Strategy B “dominates” all of the other strategies for both parties, because regardless of what the government does, companies always benefit the most from implementing Strategy B; and, regardless of what companies do, the government always benefits most from playing Strategy B. Thus, both parties should always play Strategy B, leading to a solution of (B, B).

In the end, the optimal solution to the problem of employment inequality as modeled by my game should be (B, B) for an outcome of (114, 117). This outcome is both a Nash Equilibrium solution and a Pareto Optimal solution. The specific numbers here aren’t important because I assigned them without solid data or statistics to back them up as values for comparison; however, the solution (B, B) is meaningful. Profits or economic growth might not increase by 14% and 17% exactly, but by both implementing Strategy B, the government and companies will see the greatest joint increase in prosperity and growth.

Companies should hire blind of gender, race, or background, and the government should mandate equal treatment in the workplace. By implementing these strategies to promote equality, companies and the government can drastically improve the economy and the prosperity of the nation. Companies increase their profits by hiring more skilled workers (hiring based on skill alone without taking into account other factors), and the government increases worker happiness/productivity by mandating equal treatment in the workplace. Thus, the economy improves for common people and for the nation. Companies might lose out a little bit having to pay for programs or facilities ensuring equality in the workplace, but in the end, everyone benefits, especially the people.

Further, though I didn’t take into account combinations of these strategies, the government could potentially mix many of these policies to get even better results for people. This may be an idea to build upon for future study.

How can we implement this solution?

To carry out this solution, many steps can be taken. The government can decide to pass legislation mandating greater equality in the workplace (and citizens can petition them to do so), and companies can implement more fair hiring procedures. For example, many companies currently implement blind hiring to increase workplace diversity and just get higher quality hires. Some big names like Google and BBC are already beginning to use this process, forbidding employers to ask about academics, pedigree, etc. in the hiring process, and every company, no matter how small, that makes the switch can better both the economy and their own productivity!

What can you do?

  • Petition your local (or national) government for legislation promoting equality.
  • Get local companies to implement blind hiring. Support companies that are already implementing this policy.
  • Fill out this quick survey to get you thinking and offer any potential solutions you may have:
  • Help spread awareness for employment inequality and ways to address it!!

Works Cited:

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  1. May 01, 2019 by Jessica

    Hi Katherine,

    I also did something about the labor market and equality for this conference from a different angle, and yours is so interesting! Would you mind briefly explain what is a Pareto Optimal Model and how did you made your predictions for the outcomes?

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