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American Economic Journal: Economic Policy: Vol. 5 No. 1 (February 2013)

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Unemployment in an Interdependent World

Article Citation

Felbermayr, Gabriel J., Mario Larch, and Wolfgang Lechthaler. 2013. "Unemployment in an Interdependent World." American Economic Journal: Economic Policy, 5(1): 262-301.

DOI: 10.1257/pol.5.1.262

Abstract

How do changes in labor market institutions, like more generous unemployment benefits in one country, affect labor market outcomes in other countries? We set up a two-country Armingtonian trade model with frictions on the goods and labor markets. Contrary to the literature, higher labor market frictions increase unemployment at home and abroad. The strength of the spillover depends on the relative size of countries and on trade costs. It is exacerbated when real wages are rigid. Using panel data for 20 rich OECD countries, and controlling for institutions as well as for business cycle comovement, we confirm our theoretical predictions. (JEL E24, F16, J64, J65)

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Authors

Felbermayr, Gabriel J. (U Munich and GEP, U Nottingham)
Larch, Mario (U Bayreuth and CESifo, Munich)
Lechthaler, Wolfgang (IfW, Kiel)

JEL Classifications

E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
F16: Trade and Labor Market Interactions
J64: Unemployment: Models, Duration, Incidence, and Job Search
J65: Unemployment Insurance; Severance Pay; Plant Closings

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