International Trade and Unemployment: Theory and Cross-National Evidence Pushan Dutt    Devashish Mitra   Priya Ranjan

 

Abstract:

In this paper, we present a model of trade and unemployment, in which unemployment is search induced and trade arises as a result of Heckscher-Ohlin (H-O) comparative advantage based on differences in factor proportions and/or Ricardian comparative advantage based on relative technological differences. Using cross-country data on various measures of trade policy, unemployment, and a variety of controls (that include labor-market institutions and macroeconomic distortions), and controlling for endogeneity and measurement error problems, we find fairly strong and robust evidence for the Ricardian prediction that unemployment and trade openness are negatively related (protection and unemployment are positively related). This effect of trade seems to dominate the H-O effect of trade openness on unemployment that changes from negative to positive as we move from labor-abundant to capital-abundant countries. Using panel data, we find support for an unemployment increasing short-run impact effect of trade liberalization, followed by an unemployment reducing effect leading to the new steady state.

 

Paper  Journal of International Economics, June 2009, Vol. 78, No. 1

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