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Foreign labor costs and domestic employment: What are the spillovers?

  • Dao, Mai Chi
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    This paper studies the international spillover effects of country-specific labor cost changes in the presence of labor market frictions. A two-country model with search frictions predicts that a cut in foreign labor costs leads to an increase in domestic employment, driven by a positive terms of trade effect on job creation. I find empirical evidence in support of this positive spillover effect, the terms of trade channel, and the dependence on the degree of labor market rigidity. This is done by a panel regression that estimates the effect of exogenous variation in foreign unit labor costs, instrumented by changes in foreign statutory social security contribution rates, on domestic employment and output.

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    Article provided by Elsevier in its journal Journal of International Economics.

    Volume (Year): 89 (2013)
    Issue (Month): 1 ()
    Pages: 154-171

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    Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:154-171
    DOI: 10.1016/j.jinteco.2012.06.005
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