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International trade and unemployment: theory and cross-national evidence

Author: Dutt, Pushan ; Mitra, Devashish ; Ranjan, PriyaINSEAD Area: Economics and Political Science Series: Working Paper ; 2008/06/EPS Publisher: Fontainebleau : INSEAD, 2008.Language: EnglishDescription: 32 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: In this paper we present two alternative models of trade and unemployment in which unemployment is generated through a search mechanism. The basic framework of the first model is Ricardian in that the only factor of production is labour and trade is based on relative technological differences. The second model has a Heckscher-Ohlin (H-O) framework with two factors of production, namely labour and capital that are intersectorally mobile. Using cross-country data on various measures of trade policy, unemployment and a variety of controls, we find strong evidence for the Ricardian prediction that unemployment and trade openness are negatively related (protection and unemployment are positively related). We do not find any support for the H-O prediction that this relation between trade openness and unemployment changes from negative to positive as we move from labour-abundant to capital-abundant countries. Our results are robust to the inclusion of controls for labour market institutions and macroeconomic distortions. They hold for both ordinary least squares and instrumental-variables approaches, where the latter accounts for the endogeneity of trade policy to unemployment and possible measurement errors in trade policy variables.
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In this paper we present two alternative models of trade and unemployment in which unemployment is generated through a search mechanism. The basic framework of the first model is Ricardian in that the only factor of production is labour and trade is based on relative technological differences. The second model has a Heckscher-Ohlin (H-O) framework with two factors of production, namely labour and capital that are intersectorally mobile. Using cross-country data on various measures of trade policy, unemployment and a variety of controls, we find strong evidence for the Ricardian prediction that unemployment and trade openness are negatively related (protection and unemployment are positively related). We do not find any support for the H-O prediction that this relation between trade openness and unemployment changes from negative to positive as we move from labour-abundant to capital-abundant countries. Our results are robust to the inclusion of controls for labour market institutions and macroeconomic distortions. They hold for both ordinary least squares and instrumental-variables approaches, where the latter accounts for the endogeneity of trade policy to unemployment and possible measurement errors in trade policy variables.

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