TRADE BALANCE AND UNEMPLOYMENT IN EURO REGION: A VECTOR ERROR CORRECTION MODEL APPROACH

Year 2023, Volume: 7 Issue: 1, 11 - 26, 30.06.2023

Osama Shaikh Zubair Arif Shah

Abstract

Discussing the various aspects of the growing unemployment rate, the debate of protectionism vs free trade, the rising call for "trade is bad", and "trade is eating jobs", we tried to finally establish a bivariate model linking trade balance and un-employment rate in the Euro Area by taking the quartile time-series data from 2008: Q1 – 2021: Q3. The paper studies the impact of the trade balance on the un-employment rate in the short as well as long-run using the VEC model. The estima-tion of Johansen's cointegration test resulted that the model is cointegrated in the long and with a 1 percent rise in the trade balance, the unemployment is reduced by 2.52 percent with the statistical significance of 1 percent. However, the Wald test rejected the presence of any short-run causality between the considered variables.

Keywords

Trade Balance, Unemployment, Euro Area, Cointegration, and VECM

References

• Ahmed, H. A., & Nasser, T. (2022). Long-run relationship between the un-employment rate and the current account balance in the United States: An empirical analysis. Portuguese Economic Journal, 1-20.
• Alawin, M. (2013). Trade balance and unemployment in Jordan. European Scientific Journal, 9(7).
• Andersson, D. E., Andersson, A. E., Harsman, B., & Daghbashyan, Z. ((2015)). Unemployment in European regions: structural problems versus the Eu-rozone hypothesis. Journal of Economic Geography, (15) , 883–905.
• Arouri, Fathi (2007). “Unemployment in Jordan.” Analytic and Synthetic Notes, European University Institute, No. 03. Awad, Taleb (2011). “The Problem of Unemployment.” Economic Observatory, University of Jordan.
• Awad, Taleb (2011). “The Problem of Unemployment.” Economic Obser-vatory, University of Jordan.
• Banerji, A., Saksonovs, S., Lin, H., & Blavy, R. (2014). Youth Unemploy-ment in Advanced Economies in Europe: Searching for Solutions. International Monetory Fund.
• Bjørnstad, R. and Skjerpen, T. (2006). Trade and inequality in wages and unemployment. Economic Modeling, 23(1), 20-44.
• Davidson, C., Martin, M. and Matusz, S.J. (1999). Trade and search gener-ated unemployment. Journal of International Economics, 48(2), 271-299.
• Dutt, P., Mitra, D. and Ranjan, P. (2009). International trade and unem-ployment: theory and cross-national evidence. Journal of International Economics, 78(1), 32-44.
• Engle, R. F., & Granger, C. W. (1987). Co-Integration and Error Correc-tion: Representation, Estimation, and Testing. The Econometric Society, Vol. 55, No. 2, pp. 251-276 (26 pages).
• Felbermayr, G., Prat, J., Schmerer, H.J. (2011). Trade and unemployment: What do the data say? European Economic Review. Article in press.
• Felbermayr, Gabriel; Prat, Julien; and Schmerer, Hans-Jörg. (2011). Trade and Unemployment: What Do the Data Say? European Economic Review, 55 (6), 741-758.
• Ghoshray, A., Ordóñez, J., & Sala, H. (2016). Euro, crisis and unemploy-ment: Youth patterns, youth policies? Economic Modelling, 58, 442-453.
• Heimberger, P. (2019, May 13). Unemployment in Europe: What should be done? Retrieved from The Vienna Institute of Internation Economic Studies: https://wiiw.ac.at/unemployment-in-europe-what-should-be-done-n-378.html
• Hunter, J. (2015). What is the correct interpretation of the normalized coin-tegrating coefficients in a Johansen test for cointegration? Retrieved from What is the correct interpretation of the normalized cointegrating coefficients in a Johansen test for cointegration? https://www.researchgate.net/post/What-is-the-correct-interpretation-of-the-normalized-cointegrating-coefficients-in-a-Johansen-test-for-cointegration
• King, I., & Stähler, F. (2014). International trade and directed search un-employment in general equilibrium. The Canadian Journal of Economics / Revue Canadienne d’Economique., 47(2), 580–604.
• Klein, M., & Weirowski, T. (2011). Trade and unemployment in Germany: An empirical exploration and some theory. Working Papers on Global Financial Markets., (No. 24).
• Krugman, P. (1981). Intraindustry specialization and the gains from trade. Journal of political Economy, 89(5), 959-973.
• Krugman, P.R. (1981). Intra-industry specialization and the gains from trade. Journal of Political Economy, 89, 959-973.
• Loganathan, N. S. (2011). Dynamic causal relationship between trade bal-ance and unemployment scenario in Malaysia: granger non-causality analysis. Eco-nomics and Finance Review, 1(3), 13-20.
• Melitz, M.J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695-1725.
• Moore, M.P. and Ranjan, P. (2005). Globalizations vs. skilled-biased tech-nological change: implications for unemployment and wage inequality. Economic Journal, 115(503), 391-422.
• OECD. (2021, Dec 5). Data. Retrieved from Trade Balance: https://data.oecd.org/trade/current-account-balance.htm
• OECD. (2022, Jan 13). Data. Retrieved from Unemployment rate: https://data.oecd.org/unemp/unemployment-rate.htm
• Rogoff, K. (2017, Aug 11). Protectionism won't protect jobs. Here's what will. Retrieved from World Economic Forum: https://www.weforum.org/agenda/2017/08/protectionism-wont-protect-jobs-heres-what-will
• Shaikh, O. (2020). Divisive politics and economic development. Journal of Politics, Economy, and Management 3(2), 22-30.
• Shaikh, O & Shaikh, H.(2021), Covid-19 and Challenges to Economic Models And Political Regımes, ARHUSS, (2021), 4(1): 98-115.
• Shimul, S. N., Abdullah, S. M., & Siddiqua, S. (2009). AN EXAMINA-TION OF FDI AND GROWTH NEXUS IN BANGLADESH: ENGLE GRANGER AND BOUND TESTING COINTEGRATION APPROACH. BRAC University Journal.
• Stepanok, I. (2016). Creative destruction and unemployment in an open economy model. The Canadian Journal of Economics / Revue Canadienne d’Economique., 49(3), 931–948.
• Zemanek, H., Belke, A., & Schnabl, G. (2010). Current account balances and structural adjustment in the euro area. International Economics and Economic Policy, 7(1), 83-127.