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Unemployment in an interdependent world

  • Felbermayr, Gabriel
  • Larch, Mario
  • Lechthaler, Wolfgang

How do changes in labor market institutions, like more generous unemployment benefits in one country, affect labor market outcomes in other countries? We set up a two-country Armingtonian trade model with frictions on the goods and labor markets. Contrary to the literature, higher labor market frictions increase unemployment at home and abroad. The strength of the spillover depends on the relative size of countries and on trade costs. It is exacerbated when real wages are rigid. Using panel data for 20 rich OECD countries, and controlling for institutions as well as for business cycle comovement, we confirm our theoretical predictions.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20597.

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Date of creation: 2013
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Publication status: Published in American Economic Journal: Economic Policy 1 5(2013): pp. 262-301
Handle: RePEc:lmu:muenar:20597
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