Unemployment in an Interdependent World

Gabriel J Felbermayr, Mario Larch, Wolfgang Lechthaler
2013 American Economic Journal: Economic Policy  
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
more » ... . Using panel data for 20 rich OECD countries, and controlling for institutions as well as for business cycle comovement, we confirm our theoretical predictions. JEL classification: F11, F12, F16, J64, L11 Abstract How do changes in labor market institutions like more generous unemployment benets in one country aect 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 conrm our theoretical predictions.
doi:10.1257/pol.5.1.262 fatcat:dka42ylu6vbnnnc7t45swkceoa