Instrumental Variables and Causal Mechanisms: Unpacking the Effect of Trade on Workers and Voters

Abstract

This paper shows that import exposure affects voting behavior because it affects local labor markets. We develop a new framework for mediation analysis where one instrumental variable is sufficient to identify three causal effects. Using German data from 1987–2009, we find that import exposure increases the support of nationalist parties and causes labor market turmoil. The voting response to import exposure can entirely be explained by the labor market adjustments to import exposure. Individual-level data corroborate our findings. Our novel estimation framework is applicable to a broad range of empirical studies interested in the causal mechanisms behind causal effects.

Keywords: instrumental variables, causal mediation analysis, import exposure, voting, local labor markets

JEL Classification: C360, D720, F600, J200