Trade and Productivity

We estimate the effect of international trade on average labour productivity across countries. Our empirical approach relies on a summary measure of trade that, we argue, is preferable to the one conventionally used on both theoretical and empirical grounds. In contrast to the marginally significant and non-robust effects of trade on productivity found previously, our estimates are highly significant and robust even when we include institutional quality and geographic factors in the empirical analysis. We also examine the channels through which trade and institutional quality affect average labour productivity. Our finding is that trade works through labour efficiency, while institutional quality works through physical and human capital accumulation. We conclude with an exploratory analysis of the role of trade policies for average labour productivity.