Trade openness, labour market rigidity and economic growth: A dynamic panel data analysis

Abstract

The rapid liberalisation of trade policies since the 1990s has brought additional attention to the role of trade as an engine of economic growth. Although an abundant literature addresses the relationship between openness and economic growth, the real effect of trade liberalisation is still ambiguous and undetermined. Most previous studies have ignored the selection effects of strict labour regulations on international trade. The main objective of this study is to measure the role of labour regulations in moderating the contribution of trade to economic growth among 30 Organisation for Economic Co-operation and Development countries for the period 2006-2013. In doing so, we employ a one-step Generalised Method of Moments system estimation method. Our results reveal that openness to trade does not have a robust and significant effect on growth. However, the interaction of openness with strict labour regulations enhances the contributions of trade to growth.