How an Export Boom Effect Unemployment

Economic Modelling 30 (2013) 343–355

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Economic Modelling

journal homepage: www.elsevier.com/locate/ecmod

How an export boom affects unemployment☆

Noel Gaston a, b,⁎, Gulasekaran Rajaguru a

a b

Globalisation and Development Centre and School of Business, Bond University, Gold Coast, Queensland 4229, Australia Productivity Commission, Locked Bag 2, Collins Street East, Melbourne, Victoria 8003, Australia

a r t i c l e

i n f o

a b s t r a c t

Does trade affect the equilibrium rate of unemployment? To answer this question, we propose a small open economy model that incorporates realistic features of labour markets. The model predicts that a sustained improvement in the terms of trade lowers unemployment. We test this prediction for the case of Australia, an economy that is subject to large terms of trade movements. We use a novel technique to estimate the structural model based on a combination of traditional econometric procedures and the calibration of time-varying parameters. Both reduced form and the structural estimates reveal strong evidence that higher export prices, capital accumulation in tradeable goods industries and lower unemployment benefits reduce the equilibrium unemployment rate. Crown Copyright © 2012 Published by Elsevier B.V. All rights reserved.

Article history: Accepted 4 September 2012 JEL classifications: E24 F16 J51 C23 Keywords: Equilibrium unemployment rate Structural model Calibration Dutch disease

1. Introduction Understanding the way in which external economic conditions and globalisation affect domestic labour markets has been a major research endeavour of economists for decades. More recently, the slow pace of recovery from the effects of the global financial crisis (GFC) has further stimulated research on how trade affects unemployment. Four years after the onset of the GFC, the rate of unemployment in many OECD countries remains stubbornly high. Those...