The effects of domestic labour mobility on trade agreements: Empirical evidence

This paper examines the empirical relationship between trade agreements and domestic labour mobility. The domestic‐commitment motive from Maggi and Rodriguez‐Clare (American Economic Review, 97, 2007, 1374) and standard trade models with labour frictions predict that trade liberalisation should occur when labour is more mobile. I find support for this prediction. Using regional trade agreements (RTAs) covering 56 countries in 2015, I show labour mobility is a strong predictor of trade liberalisation. The probability of an RTA increases when the country pair's average domestic labour market is less rigid. When the average labour mobility increases by 1 standard deviation from the mean, the probability of an RTA increases by 14–26%. These results are also consistent with the bound tariffs negotiated under the World Trade Organization, where less rigid labour markets are associated with lower bound tariffs.