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Trade and unemployment: What do the data say?

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  • Felbermayr, Gabriel
  • Prat, Julien
  • Schmerer, Hans-Jörg

Abstract

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with 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 control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of 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. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Suggested Citation

  • Felbermayr, Gabriel & Prat, Julien & Schmerer, Hans-Jörg, 2011. "Trade and unemployment: What do the data say?," European Economic Review, Elsevier, vol. 55(6), pages 741-758, August.
    • Handle: RePEc:eee:eecrev:v:55:y:2011:i:6:p:741-758
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    More about this item

    Keywords

    International trade Real openness Unemployment GMM models IV estimation;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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