Journal Article

Labor-Market Institutions and their Impact on Trade Partners: A Quantitative Analysis

Canadian Journal of Economics

Recent theoretical literature studies how labor market reforms in one country can affect labor market outcomes in other countries, thereby rationalizing widelyheld policy beliefs and empirical evidence. But what is the quantitative relevance of such spillover effects? This paper combines two recent workhorse models: the canonical search-and-matching framework and the heterogeneous firms international trade model. Qualitatively, the framework confirms that labor market reforms in

one country benefit its trading partners, replicating the stylized facts. However, when wages are bargained flexibly, the model quantitatively underestimates the correlation of structural unemployment rates across countries. Introducing some degree of real wage rigidity remedies this problem.

Authors

Gabriel J. Felbermayr
Mario Larch