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Trade and unemployment: What do the data say?

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

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.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20381.

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Date of creation: 2011
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Publication status: Published in European Economic Review 6 55(2011): pp. 741-758
Handle: RePEc:lmu:muenar:20381
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