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International Trade and Unemployment: Theory and Cross-National Evidence

35 Pages Posted: 22 Jan 2008  

Pushan Dutt

INSEAD - Economics and Political Sciences

Devashish Mitra

Syracuse University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Priya Ranjan

University of California, Irvine - Department of Economics

Date Written: January 21, 2008

Abstract

In this paper, we present two alternative models of trade and unemployment, in which unemployment is generated through a search mechanism. The basic framework of the first model is Ricardian in that the only factor of production is labor and trade is based on relative technological differences. The second model has a Heckscher-Ohlin (H-O) framework with two factors of production, namely labor and capital that are intersectorally mobile. Using cross-country data on various measures of trade policy, unemployment and a variety of controls, we find strong evidence for the Ricardian prediction that unemployment and trade openness are negatively related (protection and unemployment are positively related). We do not find any support for the H-O prediction that this relation between trade openness and unemployment changes from negative to positive as we move from labor-abundant to capital-abundant countries. Our results are robust to the inclusion of controls for labor market institutions and macroeconomic distortions. They hold for both ordinary least squares and instrumental-variables approaches, where the latter accounts for the endogeneity of trade policy to unemployment and possible measurement errors in trade policy variables.

Keywords: Protectionism, Unemployment, Trade and Labor

JEL Classification: F13, J64, F14

Suggested Citation

Dutt, Pushan and Mitra, Devashish and Ranjan, Priya, International Trade and Unemployment: Theory and Cross-National Evidence (January 21, 2008). INSEAD Business School Research Paper No. 2008/06/EPS. Available at SSRN: https://ssrn.com/abstract=1085994 or http://dx.doi.org/10.2139/ssrn.1085994

Pushan Dutt (Contact Author)

INSEAD - Economics and Political Sciences ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore
65-6799-5498 (Phone)

HOME PAGE: http://faculty.insead.edu/pushan-dutt/

Devashish Mitra

Syracuse University - Department of Economics ( email )

The Maxwell School of Citizenship & Public Affairs
133 Eggers Hall
Syracuse, NY 13244-1020
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Priya Ranjan

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

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