Heterogeneous output-employment relationship in the EU: The effects of international trade and regulation

Abstract

Objective: The objective of the article is to assess the impact of economic growth on employment mediated by international trade and regulation, considering the gender-, age- and educational attainment levels of employed in the European Union (EU).

Research Design & Methods: The analysis incorporates the role of international trade and its interaction with regulation in 27 European Union countries over the 2000-2020 period, utilizing an unbalanced panel dataset. The mediating effect of international trade on employment elasticities specific to gender, age, and educational attainment levels is assessed by introducing multiplicative terms involving changes in Gross Domestic Product (GDP) and various international trade variables. A three-way interaction model is employed to capture the mediating effects of international trade and regulation, i.e. labour market and business regulation, on the relationship between output and employment in the EU.

Findings: The findings suggest that the increased imports and exports in the EU are generally associated with a decline in the employment response to economic growth, especially for youth. Notably, we may observe a possible positive impact in the context of women’s employment response to economic growth. The results confirm the significance of regulation and international trade in strengthening the impact of economic growth on employment, especially for highly educated 40-64-year-old women.

Implications & Recommendations: The study revealed the mediating effect of international trade and regulation on the relationship between output and employment in the EU. The findings indicate that global trade plays an important role in decreasing the employment response to economic growth. Policymakers should focus on creating adaptive regulatory frameworks to address the relationship between regulation and the demand for skilled and unskilled labour as the reaction to output growth when a high volume of imports and exports occurs in a country. Strategies to mitigate the negative impact of international trade on employment reaction to economic growth need to address issues related to labour productivity growth, emphasising ongoing research on the mediating effect of total factor productivity.

Contribution & Value Added: Our contribution is to complement the previous research by considering regulation as the factor which simultaneously to international trade can boost the impact of economic growth on gender-, age-, and educational attainment level-specific employment in the EU.

Keywords

output–employment relationship, international trade, labour market and business regulation, three-way interaction model, European Union

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