Date of this Version

2-2011

Document Type

Working Paper

Publication Details

Gaston, N. & Rajaguru, G. (2011). How an export boom affects unemployment

Working Paper Series; No. 45, February 2011.

Copyright © Noel Gaston, Gulasekaran Rajaguru and The Globalisation and Development Centre, Bond University, 2011.

Abstract

Does trade affect the equilibrium rate of unemployment? To theoretically examine this question, we incorporate firm-union bargaining considerations into a model with a booming external sector and a stagnating manufacturing sector. In the model, a sustained improvement in the terms of trade lowers unemployment. To empirically investigate the predicted determinants of the unemployment rate, we use data for Australia, a country whose prosperity has always depended on the value of its exports. Both the 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.