Labour market rigidity and trade margins

Abstract

Countries differ, sometimes significantly, regarding their basic labour market structure. Despite the prevalence of theoretical literature, empirical studies examining the impact of labour market rigidity (LMR) on trade is sparse. Existing empirical studies have been limited to aggregate trade flows with cross-sectional estimations; a limited set of countries (e.g. OECD or Latin America) or to the period after 1990. We utilise a gravity model of trade to examine the impact of LMR on exports for 145 countries between 1964 and 2004. We utilise dis-aggregated product-level trade data and decompose total exports into the extensive and the intensive margin to examine this relationship. We also utilise total aggregate international trade relative to domestic sales, which allows for the identification of LMR-trade relationship, even in the presence of multilateral trade resistance controls. Finally, we estimate the effect of LMR on exports (and the margins) by focusing on a sample of European OECD countries via the difference-in-differences estimation. In all cases, we find that a rigid LMR reduces total exports, and this decrease is driven primarily by the intensive margin. Our findings are relevant as recent studies have found the intensive margin to be more important for long-run export growth and especially for developing countries.