Theory and Empirical Evidence Linking International Trade to Unemployment Rates

Author(s)

Maksim Belenkiy, David Riker

In this article, we review recent theoretical and empirical studies that link international trade flows and trade policies to aggregate (economy-wide) unemployment rates. The theoretical models demonstrate that there is a complex and often ambiguous relationship between trade and unemployment: whether trade increases or reduces unemployment rates depends in a complicated way on the industry composition of a country’s output and on differences in labor market frictions across industries and countries. The empirical studies, on the other hand, offer a story that is simpler and fairly consistent: they generally find that an expansion in international trade reduces a country’s aggregate unemployment rate in the long run.