Assessing the effect of trade and FDI on growth-unemployment nexus
Abstract
Research background: Unemployment is a huge topic for policymakers, scholars, and, in general, society. Historically, there have always been a lot of discussions about this phenomenon. It is already acknowledged that unemployment is closely related to economic activity: when the economy is growing, more people are employed, and when economic activity is low, employment decreases, and unemployment rises. This relation is well-researched in the framework of Okun’s law. However, it is far less known how this relationship holds if international economic relations are introduced. Thus, the motivation for the research was to examine the role of international trade and foreign direct investment (FDI) on the growth-unemployment nexus.
Purpose of the article: To assess how trade and FDI affect growth and gender-, age-, and educational attainment level-specific unemployment relationship and on what scale this effect varies over different business cycle phases.
Methods: Scientific literature review, comparative analysis, and panel regression.
Findings & value added: Given the lack of research examining what effect FDI and trade have on the growth-unemployment nexus, this paper estimates modified Okun’s equation on the European Union (EU) countries (EU–28, by the composition of the EU until 31/01/2020) for the period from 2000 to 2019 while incorporating international aspects that can have an impact on this nexus. Also, this study develops a specification that can be useful to monitor the potentially different effects of FDI and trade on the growth-unemployment nexus during different business cycle phases. The estimations of the panel regression for unemployment disaggregated by age, gender and education level has showed that import, export, inward FDI, and outward FDI have a negative effect on the growth-unemployment nexus. It means that with an increase in the intensity of international economic relations, the influence of gross domestic product (GDP) growth on unemployment becomes less significant. Thus, the effectiveness of expansionary fiscal policy to reduce unemployment becomes less effective in more open economies, which in the case of the EU are the smallest member states with relatively small domestic markets.
Keywords
foreign direct investment, unemployment, trade, gross domestic product, Okun’s law
References
- Agarwal, J. P. (1996). Does foreign direct investment contribute to unemployment in home countries? An empirical survey. Kiel Institute for the World Economy Working Papers, 765.
View in Google Scholar - Albanesi, S., & Şahin, A. (2018). The gender unemployment gap. Review of Economic Dynamics, 30, 47–67. DOI: https://doi.org/10.1016/j.red.2017.12.005
View in Google Scholar - Alfalih, A. A. (2024). The impact of oil prices, foreign direct investment and trade openness on unemployment rates in an oil-exporting country: The case of Saudi Arabia. Heliyon, 10, 1–15. DOI: https://doi.org/10.1016/j.heliyon.2024.e25094
View in Google Scholar - Ali, U., Shan, W., Wang, J. J., & Amin, A. (2018). Outward foreign direct investment and economic growth in China: Evidence from asymmetric ARDL approach. Journal of Business Economics and Management, 19(5), 706–721. DOI: https://doi.org/10.3846/jbem.2018.6263
View in Google Scholar - Altaee, H. H. A., Al-Jafari, M. K., & Khalid, M. A. (2016). Determinants of economic growth in the Kingdom of Saudi Arabia: An application of autoregressive distributed lag model. Applied Economics and Finance 3(1), 83–92. DOI: https://doi.org/10.11114/aef.v3i1.1200
View in Google Scholar - An, Z., Ball, L., Jalles, J., & Loungani, P. (2019). Do IMF forecasts respect Okun’s law? Evidence for advanced and developing economies. International Journal of Forecasting, 35(3), 1131–1142. DOI: https://doi.org/10.1016/j.ijforecast.2019.03.001
View in Google Scholar - An, Z., Ghazi, T., & Prietto, N. G. (2017). Okun’s law: unfit for low and lower middle income countries? Retrieved from https://www.imf.org/external/np/seminars/eng/2016/GlobalLaborMarkets/pdf/Ghazi_Session1_paper.pdf (30.10.2021).
View in Google Scholar - Askenazy, P., Chevalier, M., & Erhel, C. (2015). Okun’s laws differentiated by education. CEPREMAP Working Papers, 1514.
View in Google Scholar - Awad-Warrad, T. (2018). Trade openness, economic growth and unemployment reduction in Arab region. International Journal of Economics and Financial Issues, 8(1), 179–183.
View in Google Scholar - Axelrad, H., Malul, M., & Luski, I. (2018). Unemployment among younger and older individuals: Does conventional data about unemployment tell us the whole story? Journal for Labour Market Research, 52(1), 1–12. DOI: https://doi.org/10.1186/s12651-018-0237-9
View in Google Scholar - Bakari, S., & Mabrouki, M. (2017). Impact of exports and imports on economic growth: new evidence from Panama. Journal of Smart Economic Growth, 2(1), 67–79.
View in Google Scholar - Bivens, J. (2015). Yes, trade deficits do indeed matter for jobs. Economic Policy Institute. Retrieved from https://www.epi.org/blog/yes-trade-deficits-do-indeed-matter-for-jobs/ (10.09.2021).
View in Google Scholar - Brambor, T., Clark, W., & Golder, M. (2006). Understanding interaction models: Improving empirical analyses. Political Analysis, 14(1), 63–82. DOI: https://doi.org/10.1093/pan/mpi014
View in Google Scholar - Brincikova, Z., & Darmo, L. (2015). The impact of economic growth on gender specific unemployment in the EU. Scientific Annals of Economics and Business, 62(3), 383–390. DOI: https://doi.org/10.1515/aicue-2015-0026
View in Google Scholar - Butkus, M., & Seputiene, J. (2019) The output gap and youth unemployment: An analysis based on Okun’s law. Economies, 7(4), 108. DOI: https://doi.org/10.3390/economies7040108
View in Google Scholar - Butkus, M., Matuzeviciute, K., Rupliene, D., & Seputiene, J. (2020). Does unemployment responsiveness to output change on age, gender, education, and the phase of the business cycle? Economies, 8(4), 98. DOI: https://doi.org/10.3390/economies8040098
View in Google Scholar - Card, D. (2011). Origins of the unemployment rate: the lasting legacy of measurement without theory. American Economic Review, 101(3), 552–557. DOI: https://doi.org/10.1257/aer.101.3.552
View in Google Scholar - Chamberlin, G. (2011). Okun’s law revisited. Economic & Labour Market Review, 5, 104–132. DOI: https://doi.org/10.1057/elmr.2011.21
View in Google Scholar - Chang, S. C. (2009). The interactions among foreign direct investment, economic growth, degree of openness and unemployment in Taiwan. Applied Economics, 39(13), 1647–1661. DOI: https://doi.org/10.1080/00036840600675612
View in Google Scholar - Chen, K. (2010). Outward foreign direct investment, wage rigidity and unemployment: a computable general equilibrium analysis. Journal of International Trade & Economic Development, 20(4), 569–583. DOI: https://doi.org/10.1080/09638190903137206
View in Google Scholar - Dritsakis, N., & Stamatiou, P. (2018). Causal nexus between FDI, exports, unemployment and economic growth for the old European union members. Evidence from panel data. International Journal of Economic Sciences, VII(2), 35–56. DOI: https://doi.org/10.20472/ES.2018.7.2.002
View in Google Scholar - Dunsch, S. (2017). Age- and gender-specific unemployment and Okun’s law in CEE countries. Eastern European Economics, 55(4), 377–393. DOI: https://doi.org/10.1080/00128775.2017.1338962
View in Google Scholar - Ebrahimi, N. (2017). An analysis of the relationship of imports and economic growth in Iran (comparison of systematic and unsystematic cointegration methods with neural network). International Journal of economics and Financial Issues, 7(2), 338–347.
View in Google Scholar - Estrin, S. (2017). Foreign direct investment and employment in transition economies. IZA World of labor, 330, 1–10. DOI: https://doi.org/10.15185/izawol.330
View in Google Scholar - Eurostat (2020). Unemployment statistics. Retrieved from https://ec.europa.eu/eurostat/statistics-explained/index.php/Unemployment_statistics#Youth_unem ployment (01.04.2021).
View in Google Scholar - Eurostat (n.d.). Database. Retrieved from https://ec.europa.eu/eurostat/data/data base (01.04.2021).
View in Google Scholar - Fazaalloh, A. M. (2024). FDI and economic growth in Indonesia: A provincial and sectoral analysis. Journal of Economic Structures, 13(1), 3. DOI: https://doi.org/10.1186/s40008-023-00323-w
View in Google Scholar - Felbermayr, G., Prat, J., & Schmerer, H. (2011). Trade and unemployment: What do the data day? European Economic Review, 55(6), 741–758. DOI: https://doi.org/10.1016/j.euroecorev.2011.02.003
View in Google Scholar - Göçer, İ., & Erdal, L. (2015). The relationship between youth unemployment and economic growth in Central and Eastern European countries: an empirical analysis. Journal of The Faculty of Economics and Administrative Sciences, 5(1), 173–188.
View in Google Scholar - Gochero, P., & Boopen, S. (2020). The effect of mining foreign direct investment inflow on the economic growth of Zimbabve. Journal of Economic Structures, 9(54), 54. DOI: https://doi.org/10.1186/s40008-020-00230-4
View in Google Scholar - Gonese, D., Sibanda, K., & Ngonisa, P. (2023). Trade openness and unemployment in selected Southern African Development Community (SADC) Countries. Economies, 11(10), 252. DOI: https://doi.org/10.3390/economies11100252
View in Google Scholar - Harris, R., & Silverstone, B. (2001). Testing for asymmetry in Okun’s law: A cross-country comparison. Economics Bulletin, 5, 1–13.
View in Google Scholar - Huijie, G. (2018) Outward foreign direct investment and employment in Japan’s manufacturing industry. Journal of Economic Structures, 7(27), 27. DOI: https://doi.org/10.1186/s40008-018-0125-z
View in Google Scholar - Ihensekhien, O. A., & Aisien, L. N. (2019). Growth-youth unemployment nexus in upper-middle-income countries in Sub-Saharan Africa. Turkish Economic Review, 6(1), 62–76.
View in Google Scholar - International Labor Office (2010). Global employment trends. Retrieved from https://www.imf.org/external/pubs/ft/fandd/basics/unemploy.htm (24.10.2021).
View in Google Scholar - Irpan, H., Saad, R., Nor, A., Noor, A., & Ibrahim, N. (2016). Impact of foreign direct investment on the unemployment rate in Malaysia. Journal of Physics, 710(1), 012028. DOI: https://doi.org/10.1088/1742-6596/710/1/012028
View in Google Scholar - Jin, C., Lee, S., & Hwang, J. (2019). The impact of import and export on unemployment: A cross-national analysis. International Journal of Sustainable Economy, 11(4), 347–363. DOI: https://doi.org/10.1504/IJSE.2019.10025147
View in Google Scholar - Kaur, G., Sarin, V., & Dhami, J. K. (2017). Causality between exports and GDP: An empirical evidence from BIMSTEC region. In B. Kamaiah, C. Shylajan, S. Seshaiah, M. Aruna &S. Mukherjee (Eds.). Current issues in economics and finance (pp. 77–94). Singapore: Springer. DOI: https://doi.org/10.1007/978-981-10-5810-3_6
View in Google Scholar - Kim, J., Yoon, J. C., & Jei, S. Y. (2020). An empirical analysis of Okun’s laws in ASEAN using time-varying parameter model. Physica A: Statistical Mechanics and its Applications, 540(15), 123068. DOI: https://doi.org/10.1016/j.physa.2019.123068
View in Google Scholar - Kim, M. J., & Park, S. Y. (2018). Do gender and age impact the time-varying Okun’s law? Evidence from South Korea. Pacific Economic Review, 24, 672–685. DOI: https://doi.org/10.1111/1468-0106.12288
View in Google Scholar - Kim, S., Lim, H., & Park, D. (2007). Could imports be beneficial for economic growth? Some evidence from Republic of Korea. ADB ERD Working Paper Series, 103.
View in Google Scholar - Koettl, J., Mata, E., Saiovici, G., & Santos, I. (2013). Employment recovery stalls in Europe and Central Asia. Europe and Central Asia Knowledge Brief, 65. Retrieved from https://openknowledge.worldbank.org/handle/10986/16956 (15.08.2021).
View in Google Scholar - Koluman, E. (2020). Turkey: What is foreign direct investment: Definition, numbers and protection opportunities. Retrieved from https://www.mondaq.com/turkey /inward-foreign-investment/1001384/what-is-foreign-direct-investment-definitio n-numbers-and-protection-opportunities (12.08.2021).
View in Google Scholar - Kramarova, K., Svabova, L., & Gabrikova, B. (2022). Impacts of the Covid-19 crisis on unemployment in Slovakia: A statistically created counterfactual approach using the time series analysis. Equilibrium. Quarterly Journal of Economics and Economic Policy, 17(2), 343–389. DOI: https://doi.org/10.24136/eq.2022.012
View in Google Scholar - Louail, B., & Benarous, D. (2021). Relationship between economic growth and unemployment rates in the Algerian economy: Application of Okun’s law during 1991–2019. Organisations and Markets in Emerging Economies, 12(1), 71–85. DOI: https://doi.org/10.15388/omee.2021.12.48
View in Google Scholar - Marasco, A., Khalid A. M., & Tariq, F. (2023) Does technology shape the relationship between FDI and growth? A panel data analysis. Applied Economics. DOI: https://doi.org/10.1080/00036846.2023.2192033
View in Google Scholar - Meyer, D. F. (2017). An analysis of the short and long-run effects of economic growth on employment in South Africa. International Journal of Economics and Finance Studies, 9(1), 177–193.
View in Google Scholar - Mohler, L., Weder, R., & Wyss, S. (2018). International trade and unemployment: Towards an investigation of the Swiss case. Swiss Journal of Economics and Statistics, 154, 10. DOI: https://doi.org/10.1186/s41937-017-0006-7
View in Google Scholar - Moreno-Galbis, E., & Sneessens, H. (2007). Low-skilled unemployment, capital-skill complementarity and embodied technical progress. Recherches économiques de Louvain, 73(3), 241–272. DOI: https://doi.org/10.3917/rel.733.0241
View in Google Scholar - Mwakabungu, B. H. P., & Kauangal, J. (2023). An empirical analysis of the relationship between FDI and economic growth in Tanzania. Cogent Economics & Finance, 11(1), 2204606. DOI: https://doi.org/10.1080/23322039.2023.2204606
View in Google Scholar - Omoshoro-Jones, O. S. (2021). Asymmetry in Okun’s law revisited: New evidence on cyclical unemployment-cyclical output trade-offs in the free state province using NARDL model. MPRA Paper, 107126.
View in Google Scholar - Passinhas, J., & Proença, I. (2020). Measuring the gender disparities in unemployment dynamics during the recession: Evidence from Portugal. Applied Economics, 52(6), 623–636. DOI: https://doi.org/10.1080/00036846.2019.1659494
View in Google Scholar - Pizzo, A. (2019). Literature review of empirical studies on Okun’s law in Latin America and the Caribbean. International Labour Organization, Working Paper, 252.
View in Google Scholar - Privara, A. (2022). Economic growth and labour market in the European Union: Lessons from COVID-19. Oeconomia Copernicana, 13(2), 355–377. DOI: https://doi.org/10.24136/oc.2022.011
View in Google Scholar - Queneau, H., & Sen, A. (2008). Evidence on the dynamics of unemployment by gender. Applied Economics, 40(6), 2099–2108. DOI: https://doi.org/10.1080/00036840600949330
View in Google Scholar - Rizvi, S. Z. A., & Nishat, M. (2009). The impact of foreign direct investment on employment opportunities: Panel data analysis: Empirical evidence from Pakistan, India and China. Pakistan Development Review, 48(4), 841–851. DOI: https://doi.org/10.30541/v48i4IIpp.841-851
View in Google Scholar - Sarker, B. (2024). FDI-growth and trade-growth relationships during crises: Evidence from Bangladesh. Financial Innovation, 10(55), 10. DOI: https://doi.org/10.1186/s40854-023-00571-6
View in Google Scholar - Shaari, M. S., Hussain, N. E., & Halim, M. S. (2012). The impact of foreign direct investment on the unemployment rate and economic growth in Malaysia. Journal of Applied Sciences Research, 8(9), 4900–4906.
View in Google Scholar - Su, W., Zhang, D., Zhang, C., Abrhám, M., Simionescu, M., Yaroshevich, N., & Guseva, V. (2018). Determinants of foreign direct investment in the Visegrad group countries after the EU enlargement. Technological and Economic Development of Economy, 24(5), 1955–1978. DOI: https://doi.org/10.3846/tede.2018.5487
View in Google Scholar - Sun, P., & Heshmati, A. (2010). International trade and its effects on economic growth in China. IZA Discussion Papers, 5151. DOI: https://doi.org/10.2139/ssrn.1667775
View in Google Scholar - Unctad (n.d.). Datacenter. Retrieved from https://unctadstat.unctad.org/wds/Re portFolders/reportFolders.aspx?sCS_ChosenLang=en (01.04.2021).
View in Google Scholar - Usman, M., Ali, M., Kamran, H. W., & Khalid, H. (2012). Impact of exports on economic growth – a case of Luxembourg. Information Management and Business Review, 4(1), 1–7. DOI: https://doi.org/10.22610/imbr.v4i1.957
View in Google Scholar - Worstall, T. (2015). The trade deficit doesn’t cause unemployment. Forbes. Retrieved from https://www.forbes.com/sites/timworstall/2015/04/30/the-trade-deficit-doesnt-cause-unemployment/?sh=32f832a6378f (15.08.2021).
View in Google Scholar - Yueming, Z. (2014). The employment effect of outward FDI on home country. In 2nd international conference on education technology and information system (pp. 605–610). Hubei: Wuhan University of Science and Technology.
View in Google Scholar