NCPA - National Center for Policy Analysis

No Nation Was Ever Ruined By Trade

May 9, 2011

A new study, "Trade and Unemployment: What Do the Data Say?," forthrightly asks the question: Does exposure to international trade create or destroy jobs?

The researchers compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time.  They take into account other factors such as union membership, national employment protection policies, tax rates on wages and the generosity of unemployment insurance, says Ronald Bailey, Reason Magazine's science correspondent.

  • The researchers report that generous unemployment benefits correlate slightly with higher unemployment, suggesting that workers have less incentive to look hard for work.
  • In addition, high unemployment correlates with the size of the tax wedge, that is, the difference between what employees take home in earnings and what it costs to employ them.
  • This means the higher the income tax rate, the higher the level of unemployment.

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries.  Again, they find that openness to trade boosts employment, concluding that "the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point." 

So why does free trade create more jobs?

  • The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers.
  • Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand.
  • As the average efficiency of firms in a country increases, they can earn more revenues by boosting production, which leads to hiring additional workers.

Source: Ronald Bailey, "No Nation Was Ever Ruined By Trade," Reason Magazine, May 3, 2011.

For text:

http://reason.com/archives/2011/05/03/no-nation-was-ever-ruined-by-t

For study:

http://ideas.repec.org/p/iza/izadps/dp4184.html

 

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