Rotterdam Brown Bag Seminars General Economics

Julian Emami Namini (Erasmus University Rotterdam)
Wednesday, 29 June 2016

We embed a competitive search model with labor market discrimination, or nepotism, into a two-sector two-country framework in order to analyze how discrimination impacts international trade, and how international trade impacts discrimination. Discrimination (or nepotism) reduces the matching probability and output in the skilled-labor differentiated-product sector so that the country with more discriminatory firms has a comparative advantage in the simple sector. As countries alter their production mix in accordance with their comparative advantage, trade liberalization can then reinforce the negative effect of discrimination on development in the more discriminatory country and reduce its effect in the country with fewer discriminatory firms. Similarly, the profit difference between non-discriminatory and discriminatory firms will increase in the less discriminatory country and shrink in the more discriminatory one. In this way trade can further reduce discrimination in a country where it is less prevalent and increase it where it is more firmly entrenched.