Kiel Working Papers, Kiel Institute for World Economics
No 1540:
Unemployment in an Interdependent World
Gabriel Felbermayr, Mario Larch and Wolfgang Lechthaler
Abstract: 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
Keywords: Spill-over effects of labor market institutions; unemployment; international trade; search frictions; heterogeneous firms; (follow links to similar papers)
JEL-Codes: F11,; F12,; F16,; J64,; L11; (follow links to similar papers)
61 pages, August 2009
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