employment, labor force participation, and wages in local labor markets in the United States. Acemoglu et al. (2016) also estimate large negative employment effects, exacerbated through input-output linkages between various US industries. Pierce and Schott (2016) also confirm these large negative employment effects. The fact that these studies all rely on different identification and estimation strategies increases confidence in their findings. However, it is important to note that the manner in which the gains of trade materialize is highly dependent on the structure of economies regarding their resources and production technologies. While labor is an expensive factor in production in the United States, its cost is very heterogeneous across countries. Therefore, this type of adverse employment substitution effects must not be expected from enacting lower trade barriers in other country settings.

Despite the negative employment effects documented upon trade liberalization for the US, opening domestic markets to trade and foreign investments is often considered a sensible option to improve countries’ level of competitiveness. This is particularly true for LMICs, which tend to be most restrictive in these dimensions than higher-income countries. Country research by the OECD (2018a) documents skewed entry conditions for domestic versus foreign firms in Kazakhstan: while domestic firms enjoy highly facilitated registration processes, foreign firms and suppliers are hindered by burdensome procedures, low automation, and poor information availability. Besides entry requirements, there are sometimes differences in operational rules. In Indonesia, foreign companies are required to hold higher minimum capital requirements, to comply with stringent conditions on the employment of foreigners in key management positions, and to be subject to limitations on branching and land access (Lewis et al., 2022). In addition, some activities are entirely reserved for domestic companies. In a recent report, Vitale et al. (2020) rely on the 2018 edition of OECD PMR indicators on 35 OECD and 11 non-OECD countries to illustrate the potential of liberalizing countries’ trade and FDI regulations. The authors point out that, compared to the OECD average, countries in Latin America and the Caribbean rank especially restrictive in these dimensions and could profit from opening up more to foreign trade and participation. More generally, they also highlight the particular importance of lowering domestic entry barriers for foreign suppliers, especially concerning the retail trade and professional services.

To what extent can increased openness to trade and FDI positively affect labor market outcomes? A strand of empirical work documents how countries see higher aggregate employment when they increase competition in product markets by widening scope for trade and/or foreign participation. Using panel data from 20 OECD countries, Felbermayr et al. (2011) find that a 10-percentage-point increase in trade openness lowers the equilibrium rate of unemployment by about 0.8 percentage points. Most importantly, however, they find no evidence for an unemployment-increasing effect of trade openness in their panel data set or in a larger cross-sectional one. Similarly, Piton and Rycx (2019) rely on OECD PMR indicators and country–fixed effect regressions to analyze the effects of product market deregulations on employment. Alongside to lowering entry barriers, they find that reducing barriers to trade and FDI is key to explaining the overall impact of product market reforms between 1998–2013. The average trade and FDI reforms over the period are associated with a decline in the predicted unemployment rate by 0.3 percentage points.

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