The impact of trade policy uncertainty on labour demand elasticity: evidence from China

ABSTRACT

Research on the effect of trade on labour demand elasticity is rich, but lacks studies on the effect of trade policy uncertainty. Using firm-level labour demand elasticity data from China, this paper supplements current research by presenting evidence for the impact of trade policy uncertainty on labour demand elasticity. Using the granting Permanent Normal Trade Relations (PNTR) status by the US to China as a quasi-natural experiment, this paper constructs a difference-in-differences model. The empirical results show that a reduction in trade policy uncertainty following the grant of PNTR status significantly reduces labour demand elasticity in China. The decrease in trade policy uncertainty thereby improves employment stability. This paper reveals the importance of cultivating a stable international trade policy environment for stabilizing the domestic job market.

KEYWORDS:

• Trade policy uncertainty
• labour demand elasticity
• employment stability
• difference-in-differences model

JEL CLASSIFICATION:

• F16
• F13
• J23

Disclosure statement

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

Notes

¹ Labour demand elasticity itself is negative and we consider its absolute value. If the estimation coefficient is positive, then the absolute value of labour demand elasticity decreases.

² The formula is $Tga{p}_p=1-{\left({\tau }_p^{col2}/{\tau }_p^{MFN}\right)}^{-\sigma }$ and we set $\sigma$ to 3. Please see Handley and Limão (2017) for a detailed discussion.

Additional information

Funding

This work was supported by the National Social Science Fund of China (21BJL111) and the National Natural Science Foundation of China (71903003).