Do Labor Market Institutions Affect International Comparative Advantage? An Empirical Investigation

The aim of this paper is to explore the different determinants of international comparative advantage. Starting from a theoretically well founded neoclassical framework, where specialization depends on relative factor endowments and technological differences, we study the role of the institutional diversity in the labor market. We use an international trade model where endogenous effort is included in an otherwise standard production function. Since the effort level can be affected by country-specific labor institutions, the institutional context may in turn be able to influence the international comparative advantage. After illustrating the theoretical motivations for such an effect, we implement a rigorous econometric analysis on a group of OECD countries to test its empirical validity. We obtain that institutions have an important role in explaining the relative economic performance of a number of manufacturing sectors. In particular, stronger labor market institutions are found to advantage capital-intensive sectors and disadvantage labor-intensive ones. Policy implications are derived and discussed