EFFECTS OF TRADE OPENNESS ON UNEMPLOYMENT RATE: EVIDENCE FROM SELECTED LEAST DEVELOPED COUNTRIES (LDCS)

Abstract

Trade openness may create new jobs or reduce the existing ones. Hence, the
effects of trade openness on unemployment rate are obvious but the nature and
strength of the effects are found to be different in literature. In this study, we
aim to unveil the effects of trade openness on unemployment rate in 12 Least
Developed Countries (LDCs) for a period of 1995 to 2016 by following the Least
Squares Dummy Variable Corrected (LSDVC) panel estimation method which
corrects the probable bias of using small cross-sectional units. Some economic
indicators like inflation, real interest rate, government stability and two labor
market indicators namely labor market regulation and labor freedom index are
also taken into account. Trade openness is found to increase the unemployment
rate which prevails true when alternative measures are used. Also, previous
year’s unemployment rate increases current unemployment rate. Inflation and
real interest rate are found to have insignificant impacts. But labor market
regulation and labor freedom significantly influence unemployment rate while
the former increases and the later decreases the rate of unemployment. Moreover,
the interactive effects of trade openness and labor freedom imply that trade
openness may reduce the unemployment rate at higher level of labor freedom.
Hence, LDCs should adopt more flexible labor market regulations and improved
labor freedom to get the beneficial effects of trade openness on unemployment.