More trade means more jobs

See “No Nation Was Ever Ruined By Trade” by Ronald Bailey of Reason magazine. Excerpts:

"A new study, Trade and Unemployment: What Do the Data Say?, by three European economists published in the journal, European Economic Review in March, forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs."

"The researchers then compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time. They take into account other factors such as union membership, national employment protection policies, tax rates on wages, and the generosity of unemployment insurance.

The researchers report that generous unemployment benefits correlate slightly with higher unemployment, suggesting that workers have less incentive to look hard for work. Also, high unemployment correlates with the size of the tax wedge, that is, the difference between what employees take home in earnings and what it costs to employ them. Basically, this means the higher the income tax rate, the higher the level of unemployment.

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries. They take into account features like the size of the black market economy and whether a country is landlocked or not. Again, they find that openness to trade boosts employment, concluding that “the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point.”

So why does free trade create more jobs? The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers. Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand. As the average efficiency of firms in a country increases, they can earn more revenues by boosting production. And that leads to hiring additional workers.

To get some idea of how much opening international trade further would benefit people, economists at the Peterson Institute for International Economics in Washington, D.C., calculate that concluding the Doha Round of free trade negotiations could boost global GDP between $165 billion and $283 billion per year."