Labor and Employment

This paper examines government policies in a labor market where expatriates constitute a sizeable majority of the labor force. It develops a large rm version of the matching model with intrafirm bargaining and constant returns in production. In the model, the firm’s hiring decisions are driven by the increasing costs of employing expatriates relative to nationals rather than workers’ productivities. This approach contrasts with the prior literature which has captured the employment effect on wages based on assumptions of increasing or decreasing labor productivity rather than the firm’s cost structure. The model is calibrated to the data from the United Arab Emirates (UAE) where approximately 90% of the workforce is imported labor. It finds that beyond a certain cost level of employing expatriates, the firms would decrease overall employment and unemployment for UAE nationals rises.

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