Ethnic diversity, market structure and risk sharing in developing countries

The paper addresses mainly three questions. One, do workers tend to be employed by employers of the same ethnic group; two, what is the structure of the equilibrium wage contract; and three, do more ethnically homogeneous labor markets tend to have different labor contracts than more ethnically diversified ones. The answer to the first question is in the affirmative – in equilibrium all employers offer the same wage contract and workers are hired by employers of the closest ethnic affiliation. In terms of the equilibrium wage contract, its nature depends on the attitude toward risk of both sides of the market. Finally, the answer to the third question is also in the affirmative since the more homogenous the labor market, the more deterministic is the wage.