Exploring the Impact of Trade Openness on Unemployment: A Cross-Country Analysis

Abstract

This study investigates the relationship between trade openness and unemployment in both capital-abundant and labour-abundant countries, while also considering other control variables such as inflation rate, economic growth, population growth, and political rights. The analysis covers the period from 1990 to 2016 and includes data from 75 labour-abundant countries and 44 capital-abundant countries. To ensure the reliability of the results, the study employs various statistical techniques including IPS panel unit root test to assess the normality and stationarity of the variables, as well as Mean Group and Pooled Mean Group heterogeneous panel cointegration techniques to examine the long-run relationships among the variables. The findings suggest that in labour-abundant countries, trade openness has a significantly negative impact on unemployment in the long run. Additionally, variables such as inflation rate and institutional quality are found to have negative and significant effects on unemployment, while population growth is positively and significantly related to unemployment in these countries. Conversely, in capital-abundant countries, trade openness is found to have a significantly positive impact on unemployment in the long run. The inflation rate still has a negative and significant impact on unemployment, while population growth remains positively and significantly related to unemployment. However, the coefficient of institutional quality is statistically insignificant in capital-abundant countries. These results indicate that the relationship between trade openness and unemployment varies depending on the abundance of capital or labour in a country. Additionally, factors such as inflation rate, population growth, and institutional quality play significant roles in shaping unemployment dynamics in both types of countries.