Product and Labor Market Entry Costs, Underemployment and International Trade

  • Spiros BougheasEmail author
  • Raymond Riezman


We develop a small, open economy, two-sector model with heterogeneous agents and endogenous participation in a labor matching market. There are two types of agents: workers and entrepreneurs. Both populations are heterogeneous. Workers are distinguished by their potential ability as skilled workers and entrepreneurs by their potential ability to manage a firm. To capture the notion of decentralized labor markets we assume random matching. Those agents on the long side of the market who are not matched find employment in the unskilled sector as do those agents who decided not to attempt to enter the matching market. The output of matched pairs is a function of the two partners’ abilities. We find that disparities in labor institutions become a source of comparative advantage. The exact patterns will depend not only on the costs of entering the skilled sector but also on the mechanism used for dividing the surplus. We analyze the implications of asymmetric market entry costs for the patterns of international trade and underemployment. We find that if labor market inefficiencies are sufficiently strong trade liberalization can lead to welfare losses. We also examine the robustness of our results when we allow for complementarities in the production function and for alternative matching mechanisms.


Labor Market Comparative Advantage Matched Pair Sharing Rule Entry Cost 
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We would like to thank participants at the Society for the Advancement of Economic Theory Conference, Ischia 2009, the Mid-West International Economics Meeting, Evanston, 2010, the GEP Annual Conference, University of Nottingham 2010, the CESifo Area Conference on Global Economy, Munich, 2011, the Conference on Worker-Specific Effects of Globalization, Tubingen, 2011, the ETSG Conference, Copenhagen, 2011, the Conference on Globalization: Strategies and Effects, Kolding Denmark, 2011 and seminar participants at ECARES, Brussels, 2011, the University of Southern California, 2012 and the University of Tennessee, 2012 for helpful comments and suggestions. The usual disclaimer applies.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2017

Authors and Affiliations

  1. 1.School of EconomicsUniversity of NottinghamNottinghamUK
  2. 2.University of Iowa, GEP, CESifoIowa CityUSA

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