Trade and Unemployment:What Do the Data Say?

This paper documents a robust empirical regularity: in the long-run, higher trade openness iscausally associated to a lower structural rate of unemployment. We establish this fact using:(i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries.The time structure of the panel data allows us to deal with endogeneity concerns, whereascross-sectional data make it possible to instrument openness by its geographical component.In both setups, we carefully purge the data from business cycle effects, include a host ofinstitutional and geographical variables, and control for within-country trade. Our main findingis robust to various definitions of unemployment rates and openness measures. Thepreferred specification suggests that a 10 percent increase in total trade openness reducesunemployment by about one percentage point. Moreover, we show that openness affectsunemployment mainly through its effect on TFP and that labor market institutions do notappear to condition the effect of openness....