Trade and Unemployment: What Do the Data Say?

47 Pages Posted: 26 May 2009

See all articles by Gabriel J. Felbermayr

Gabriel J. Felbermayr

University of Stuttgart-Hohenheim

Julien Prat

University of Vienna; IZA Institute of Labor Economics

Hans‐Jörg Schmerer

Government of the Federal Republic of Germany - Institute for Employment Research (IAB)

Abstract

This paper documents a robust empirical regularity: in the long-run, higher trade openness is causally associated to a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to deal with endogeneity concerns, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we carefully purge the data from business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. The preferred specification suggests that a 10 percent increase in total trade openness reduces unemployment by about one percentage point. Moreover, we show that openness affects unemployment mainly through its effect on TFP and that labor market institutions do not appear to condition the effect of openness.

Keywords: international trade, real openness, unemployment, GMM models, IV estimation

JEL Classification: F16, E24, J6

Suggested Citation

Felbermayr, Gabriel J. and Prat, Julien and Schmerer, Hans-Joerg, Trade and Unemployment: What Do the Data Say?. IZA Discussion Paper No. 4184, Available at SSRN: https://ssrn.com/abstract=1409288

Gabriel J. Felbermayr (Contact Author)

University of Stuttgart-Hohenheim ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany

Julien Prat

University of Vienna ( email )

Bruenner Strasse 72
Vienna 1210, Vienna
Austria

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Hans-Joerg Schmerer

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

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