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International trade and employment: Theory and evidence from Korean firms

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Listed:
  • Priyaranjan Jha
  • Jae Yoon Lee
  • Yang Liang
  • Devashish Mitra

Abstract

We extend the small country trade model with firm heterogeneity (Demidova and Rodriguez‐Clare, Journal of International Economics, 90, 2013 and 266) to incorporate offshoring (along with final goods trade). We derive the firm‐level employment implications of output and input trade and trade costs and test them using Korean firm‐level data for the period 2006–2016. A key theoretical result is that the impact of a change in offshoring cost on employment depends crucially on the net substitutability between inputs where net substitutability is the difference between the elasticities of input substitution and output substitution. Empirically, we find that a decrease in the input trade cost reduces employment and the impact is stronger, the greater the net substitutability between inputs. Our 2SLS results with firm‐level imports (in place of trade costs) are consistent with our results with trade costs.

Suggested Citation

  • Priyaranjan Jha & Jae Yoon Lee & Yang Liang & Devashish Mitra, 2021. "International trade and employment: Theory and evidence from Korean firms," The World Economy, Wiley Blackwell, vol. 44(11), pages 3351-3388, November.
    • Handle: RePEc:bla:worlde:v:44:y:2021:i:11:p:3351-3388
    DOI: 10.1111/twec.13133
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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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