Trade and Unemployment: What do the data say?

25  November 2010    4:00 pm CET

Julien Prat, Institute of Economic Analysis, Barcelona

In cooperation with:


wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)


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 from 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 preferred specification suggests that a 10 per cent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Keywords: international trade, real openness, unemployment, GMM models, IV estimation

JEL classification: F16, E24, J6