Foreign labor costs and domestic employment: What are the spillovers?

Mai Dao

Journal of International Economics, 2013, vol. 89, issue 1, 154-171

Abstract: This paper studies the international spillover effects of country-specific labor cost changes in the presence of labor market frictions. A two-country model with search frictions predicts that a cut in foreign labor costs leads to an increase in domestic employment, driven by a positive terms of trade effect on job creation. I find empirical evidence in support of this positive spillover effect, the terms of trade channel, and the dependence on the degree of labor market rigidity. This is done by a panel regression that estimates the effect of exogenous variation in foreign unit labor costs, instrumented by changes in foreign statutory social security contribution rates, on domestic employment and output.

Keywords: International spillover effects; Terms of trade; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 F41 F42 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:89:y:2013:i:1:p:154-171

DOI: 10.1016/j.jinteco.2012.06.005

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