Effect of Trade Openness on Unemployment in Case of Labour and Capital Abundant Countries

Abstract

This study examined the impact of trade openness on unemployment in case of capital-abundant and labourabundant countries. Inflation rate, economic growth, population growth and political rights have been used as control variables in our empirical analysis. For this purpose, the study used the data for the period of 1990- 2012 for 75 labour-abundant countries and 44 capital-abundant countries. IPS panel unit root test is used to check the normality and stationarity of the variables of interest and Mean Group and Pooled Mean Group heterogeneous panel cointegration techniques have been used to check the long run relationships among the variables of our study and to find the long run and short run parameters. In case of labour-abundant countries, trade openness has a significantly negative impact on unemployment in the long run. The variables of inflation rate and institutional quality also have negative and significant impact on unemployment. On the other hand, population growth is positively and significantly related with unemployment in the labour-abundant countries. While in case of capital-abundant countries, trade openness has a significantly positive impact on unemployment in the long run. The inflation rate also has negative and significant impact on unemployment. The impact of Population growth on unemployment is positively and significant. The coefficient of institutional quality remains statistically insignificant in case of capital-abundant countries.