Unemployment in an interdependent world

Arbeitspapier

We introduce search and matching unemployment into a model of trade with differentiated goods and heterogeneous firms. Countries may differ with respect to size, geographical location, and labor market institutions. Contrary to the literature, our single-sector perspective pays special attention to the role of income effects and shows that bad institutions in one country worsen labor market outcomes not only in that country but also in its trading partners. This spill-over effect is conditioned by trade costs and country size: smaller and/or more centrally located nations suffer less from inefficient policies at home and are more heavily affected from spill-overs abroad than larger and/or peripheral ones. We offer empirical evidence for a panel of 20 rich OECD countries. Carefully controlling for institutional features and for business cycle comovements between countries, we confirm our qualitative theoretical predictions. However, the magnitude of spill-over effects is larger in the data than in the theoretical model. We show that introducing real wage rigidity can remedy this problem.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: FZID Discussion Paper ; No. 06-2009

Classification and Topics

• Classification: Wirtschaft ; Neoclassical Models of Trade ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Trade and Labor Market Interactions ; Unemployment: Models, Duration, Incidence, and Job Search ; Production, Pricing, and Market Structure; Size Distribution of Firms
• Subject: Spill-over effects of labor market institutions ; unemployment ; international trade ; search frictions ; heterogeneous firms

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Felbermayr, Gabriel ; Larch, Mario ; Lechthaler, Wolfgang
• Event: Veröffentlichung
• (who): Universität Hohenheim, Forschungszentrum Innovation und Dienstleistung (FZID)
• (where): Stuttgart
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/27762
• URN: urn:nbn:de:bsz:100-opus-3873
• Last update: 10.03.2025, 11:43 AM CET