Trade-induced Unemployment in Labor-abundant and Capital-abundant OIC Countries: Asymmetric Evidence from Quantile-on-Quantile Regression

Abstract

This study aims to analyze the impact of trade openness on unemployment in labor-abundant and capital-abundant countries of Organization of Islamic Cooperation (OIC) by taking the data from 1991 to 2018. A new technique quantile-on-quantile (QQ) is applied to show how quantiles of trade openness asymmetrically affect the quantiles of unemployment by providing an appropriate framework to capture the overall dependence structure. 8 out of 10 capital-abundant countries show a positive association between trade openness and unemployment, while 7 out of 10 labor-abundant countries indicate a negative effect of trade openness on unemployment. Hence, the majority of selected labor-abundant and capital-abundant countries are validating Heckscher-Ohlin theory of international trade. The results show that the asymmetric intensity of trade-induced unemployment varies with countries at both bottom and upper quantiles of the distribution of data that require individual attention in postulating the policies related to trade and unemployment in OIC countries.

KEYWORDS:

• Trade-induced unemployment
• Heckscher-Ohlin theory
• quantile-on-quantile (QQ) approach
• quantile regression (QR) approach

Acknowledgement

This paper is a part of the first author’s thesis for hisPhD in Economics, School of Business and Economics, Universiti Putra, Malaysia.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

Note:*, ** and *** indicate that the value is significant at the 1%, 5% and 10% levels of significance, respectively.

Note:’*’indicates that the value is significant at the 1% level of significance

Note: The t-statistic for quantile cointegration is obtained by applying an equally spaced grid of 19 quantiles (0.05–0.95). Supremum norm value of coefficients (β and γ) are given while their critical values at 1, 5, and 10% level of significance are represented by CV1, CV5, and CV10, respectively.

1 For instance, the study of Sachs et al. (1995) found that economic reformations of trade openness lead to more economic growth and macroeconomic performances especially in underdeveloped countries. Irwin and Tervio (2002) argued that countries with larger trade openness have higher incomes.

2 See Ricardo (1817).

3 See Heckscher (1919) and Ohlin (1933).

4 The Balassa-Samuelson effect or productivity baised purchasing power parity is referred to Balassa (1964) and Samuelson (1964) which explains that the differences in prices and incomes across countries are due to differences in their productivity. It postulates that consumer prices are systematically higher in developed economies than in developing countries.

5 The law of one price is considered the base of purchasing power parity (PPP) which demonstrates that the value of two currencies is equal when a basket of identical goods in the two countries is priced the same.

6 (Chad, Mali, Mozambique, Guinea-Bissau, Niger, Guinea, Sierra Leone, Burkina Faso, Togo, and Cameroon).

7 (Saudi Arabia, Brunei, United Arab Emirates, Qatar, Bahrain, Oman, Kuwait, Turkey, Suriname, and Lebanon).

8 A variety of alternative bandwidth values have also been checked. The outcomes of the estimation, however, remain qualitatively similar.

Additional information

Notes on contributors

Sajid Ali

Sajid Ali is working as a lecturer in School of Economics, Bahauddin Zakariya University, Multan, Pakistan. Currently, he is doing his PhD in School of Business and Economics, Universiti Putra, Malaysia. His research interests are environmental economics and international trade. His email is [email protected].

Zulkornain Yusop

Zulkornain Yusop is a professor of Economics in School of Business and Economics, Universiti Putra, Malaysia. He is also working as a CEO of Putra Business School, Malaysia. His area of interest is international economics. He can be reached at [email protected].

Shivee Ranjanee Kaliappan

Shivee Ranjanee Kaliappan is an associate professor in School of Business and Economics, Universiti, Putra, Malaysia. Her research interests are international trade and development economics. She can be reached through this email: [email protected].

Lee Chin

Lee Chin is an associate professor in School of Business and Economics, Universiti Putra, Malaysia. Her research interests are international economics and financial economics. She can be contacted through email: [email protected].