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Unemployment in an interdependent world

Gabriel Felbermayr (), Mario Larch () and Wolfgang Lechthaler

No 06-2009, FZID Discussion Papers from University of Hohenheim, Center for Research on Innovation and Services (FZID)

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 (search for similar items in EconPapers)
JEL-codes: F11 F12 F16 J64 L11 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dge and nep-lab
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Related works:
Journal Article: Unemployment in an Interdependent World (2013) Downloads
Working Paper: Unemployment in an interdependent world (2013)
Working Paper: Unemployment in an interdependent world (2012) Downloads
Working Paper: Unemployment in an Interdependent World (2009) Downloads
Working Paper: Unemployment in an Interdependent World (2009) Downloads
Working Paper: Unemployment in an interdependent world (2009) Downloads
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