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Rigid labour markets with trade and capital mobility: theory and evidence

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  • Peter Egger
  • David Greenaway
  • Tobias Seidel

Abstract

We develop a multi‐country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra‐industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced‐form regressions as well as simulation results of a calibrated general equilibrium model. On développe un modèle à plusieurs pays avec des marchés du travail imparfaits pour étudier l’effet des frictions dans les marchés du travail sur les flux de commerce bilatéraux. On utilise un cadre analytique qui permet le commerce des biens et la mobilité du capital, et on montre que les imperfections sur le marché du travail ont des effets opposés en l’absence de mobilité du capital (à court terme) et quand mobilité du capital il y a (à long terme). A court terme, un fort degré de rigidité dans le marché du travail réduit la valeur totale du commerce, mais accroît la part du commerce intra‐industrie pour le pays qui a une taille plus grande que celle de son partenaire commercial. Les effets inverses sont observés quand on permet au capital de traverser les frontières. A l’aide de données sur le chômage et la répartition du revenu pour 23 pays de l’OCDE, on calcule le paramètre central du modèle théorique qui décrit le degré de rigidité du marché du travail. On utilise ce nouveau concept empirique pour tester les résultats théoriques au moyen de régressions de formes réduites ainsi qu’au moyen de simulations d’un modèle calibré d’équilibre général.

Suggested Citation

  • Peter Egger & David Greenaway & Tobias Seidel, 2011. "Rigid labour markets with trade and capital mobility: theory and evidence," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(2), pages 509-540, May.
    • Handle: RePEc:wly:canjec:v:44:y:2011:i:2:p:509-540
    DOI: 10.1111/j.1540-5982.2011.01642.x
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    Cited by:

    1. Schmerer, Hans-Jörg, 2012. "FDI, skill-specific unemployment, and institutional spillover effects," Economics Discussion Papers 2012-2, Kiel Institute for the World Economy (IfW Kiel).
    2. Egger, Hartmut & Egger, Peter & Kreickemeier, Udo, 2013. "Trade, wages, and profits," European Economic Review, Elsevier, vol. 64(C), pages 332-350.
    3. Deininger, Klaus & Jin, Songqing & Xia, Fang & Huang, Jikun, 2014. "Moving Off the Farm: Land Institutions to Facilitate Structural Transformation and Agricultural Productivity Growth in China," World Development, Elsevier, vol. 59(C), pages 505-520.
    4. Selwaness, Irène & Zaki, Chahir, 2019. "On the interaction between exports and labor market regulation: Evidence from the MENA countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 24-33.
    5. Xi Yang & Dao‐Zhi Zeng, 2021. "Trade liberalisation with mobile capital and firm heterogeneity," The World Economy, Wiley Blackwell, vol. 44(2), pages 530-559, February.
    6. Jayjit Roy, 2016. "Employment Protection Legislation and International Trade," Working Papers 16-06, Department of Economics, Appalachian State University.
    7. Roy, Jayjit, 2021. "The effect of employment protection legislation on international trade," Economic Modelling, Elsevier, vol. 94(C), pages 221-234.
    8. Schmerer, Hans-Jörg, 2012. "Skill-biased labor market reforms and international competitiveness," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-39.
    9. Falvey, Rod & Greenaway, David & Silva, Joana, 2010. "Trade liberalisation and human capital adjustment," Journal of International Economics, Elsevier, vol. 81(2), pages 230-239, July.
    10. Li, Guangzhong & Egger, Peter H. & Li, Jie & Wu, Han, 2022. "Exporting firms’ factor and product-quality adjustments in response to employment protection legislation: Evidence from China," China Economic Review, Elsevier, vol. 73(C).
    11. Le Riche, Antoine & Lloyd-Braga, Teresa & Modesto, Leonor, 2022. "Intra-industry trade, involuntary unemployment and macroeconomic stability," Journal of Mathematical Economics, Elsevier, vol. 99(C).

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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