Labor Market Structures, Trade and their Effect on Unemployment: A Theoretical Analysis and Empirical Investigation

This paper investigates the effects of different labor market structures on the level of unemployment. A theoretical interpretation of an open economy version of the Calmfors and Driffill framework with traded good sector and sheltered non traded good sector is presented, in which different wage-employment trade-offs faced by unions in traded and non traded goods sector as well as the degree of openness is taken into account. From a theoretical point of view the framework supports the idea of the hump-shaped relationship between the degree of centralization of the bargaining process and the level of unemployment, which is sustained even with increased openness. Countries with an intermediate level of bargaining are expected to benefit most in terms of lower unemployment from an increase in openness. In an empirical part, the model is applied to a panel of 20 OECD countries over the period 1970-2000 and the predictions of the model are tested. I find empirical support for both of the main hypothesis, particularly if the strength of the employment protection is additionally taken into account. The results render also support to the literature on the interaction of product market regulations and labor market institutions, as countries which face stronger competition in the product market from foreign producers stand to benefit more from a deregulation in the labor market via a weakening of the employment protection legislation.