Foreign Direct Investment, Search Unemployment, and the Role of Labor Market Institutions

Hans-Joerg Schmerer ()

VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis from Verein für Socialpolitik / German Economic Association

Abstract: This paper proposes a simple multi-industry trade model with search frictions in the labor market. It will be shown that the reallocation of capital across countries in formof FDI leads to changes in unemployment at the extensive and intensive industry margins. Whether a country benefits from FDI highly depends on the respective country’s net-FDI flows. Unilateral changes in labor market institutions trigger spillover effects induced by a reallocation of industries across countries, which affects labor markets in all economies integrated through trade. The model yields two predictions that are tested in the second part of the paper by use of OECD data on unemployment, FDI, and labor market institutions. It will be shown that net-FDI is robustly associated with lower rates of aggregate and skill-specific unemployment. Finally, the theoretical and empirical findings also suggest that countries that exhibit a high degree of employment protection, or union density tend to have relatively more outward-FDI flows.

JEL-codes: F10 F16 J60 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc11:48730

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