Investigating Exploitation and Productivity in Explaining the Disability Wage Penalty

The paper explains the low wages of the disabled in a monopsonistic framework. In the disabled m arket firms face different costs of adjustment ("disabled-friendly" firm vs. "disabled-unfriendly" firm), high or low, and offer wages according to these costs. Hence, there will be high- and low-paid disabled. Also, employers can exploit the disabled to increase profits knowing that they face high search costs. This mechanism describes the pre-reform period. In the post-reform period, the adjustment costs are fully covered by programmes designed to help the disabled find and stay in work (e.g. Access to Work, 1996). In addition, legislation (Disability Discrimination Act, 1995) prohibits discrimination hence firms are not allowed to treat the disabled and nondisabled differently. These mechanisms are modelled using an extension of the simple Burdett-Mortensen model (1998). Using data from the BHPS, we find that in the post-reform period wages increase for the disabled and non-disabled but more for the disabled. Also, disabled at the bottom of the wage offer distribution (i.e. mainly disabled in low productivity firms) in the pre-reform period, move more to the right of the distribution in the post-reform period.