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Foreign Direct Investment, Search Unemployment, and the Role of Labor Market Institutions

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  • Schmerer, Hans-Jörg

Abstract

This paper proposes a simple multi-industry trade model with search frictions in the labor market. It will be shown that the reallocation of capital across countries in formof FDI leads to changes in unemployment at the extensive and intensive industry margins. Whether a country benefits from FDI highly depends on the respective country’s net-FDI flows. Unilateral changes in labor market institutions trigger spillover effects induced by a reallocation of industries across countries, which affects labor markets in all economies integrated through trade. The model yields two predictions that are tested in the second part of the paper by use of OECD data on unemployment, FDI, and labor market institutions. It will be shown that net-FDI is robustly associated with lower rates of aggregate and skill-specific unemployment. Finally, the theoretical and empirical findings also suggest that countries that exhibit a high degree of employment protection, or union density tend to have relatively more outward-FDI flows. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48730.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48730

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  1. Dutt, Pushan & Mitra, Devashish & Ranjan, Priya, 2009. "International trade and unemployment: Theory and cross-national evidence," Journal of International Economics, Elsevier, vol. 78(1), pages 32-44, June.
  2. Brecher, Richard A, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 98-116, February.
  3. Andrea Bassanini & Romain Duval, 2009. "Unemployment, institutions and reform complementarities: Re-assessing the aggregate evidence for OECD countries," Post-Print halshs-00395144, HAL.
  4. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
  5. Felbermayr, Gabriel & Larch, Mario & Lechthaler, Wolfgang, 2013. "Unemployment in an interdependent world," Munich Reprints in Economics 20597, University of Munich, Department of Economics.
  6. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  7. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
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