2. Estimating trade and employment elasticities within sectors

# 2.1 Do trade-employment elasticities differ for exports and imports?

Analysis for a sample of 48 OECD and non-OECD countries covering 45 sectors for the period 19952018 finds that export-employment elasticities within sectors are positive.<sup>11</sup> Specifically, a 10 percent increase in exports is associated with a 3.1 percent increase in employment (Figure 1, left panel).<sup>12</sup> On the downside, the potential for exports to contribute to job growth within sectors in the country sample was driven by the period before the global financial crisis (i.e., 1995-2006), while estimates for the more recent period (i.e., 2007-2018) are either insignificant or the chosen instruments for the trade variable not valid.<sup>13</sup> A possible explanation may be a growing capital intensity of export production, including the use of laborsubstituting technologies, during the more recent period (Hallward-Driemeier and Nayyar 2017).

**Figure 1: Trade-employment (left) and trade-income elasticities (right), by type of trade**

<!-- Start of picture text --> 0.8 0.8<br>0.7 0.7<br>0.6 0.6<br>0.5 0.5<br>0.4 0.4<br>0.3 0.3<br>0.2 0.2<br>0.1 0.1<br>0.0 0.0<br>Exports Intermediate Final imports Exports Intermediate Final imports<br>imports imports<br><!-- End of picture text --> Source: Own computations. Data: OECD TiE and TiVA data, covering 48 countries (see Appendix 2) and 45 sectors for the period 1995-2018. Note: Trade-employment (trade-income, resp.) elasticities at the country-sector level have been estimated using employment (labor income, resp.) (in natural logs) as dependent variable and the instrumented trade variables (in levels and natural logs) as independent variable. For more information on the instruments, see Appendix 1. The panel data regressions control for country-sector, country-time, and sector-time fixed effects. Only results significant at the 10% level and above the critical value for the Kleibergen-Paap test statistic are reported.

The average intermediate import-employment elasticity is 0.42 percent, while final imports show an elasticity of 0.18 percent – less than half that size (Figure 1, left panel). Intermediate goods and services can be used in domestic production destined either for final consumption or exports and in both cases support job growth. The lower correlation between final imports of goods and services and employment in a sector implies that they also compete with domestic production and therefore employment.

Comparing trade-employment with trade-income elasticities suggests that the income channel is stronger, especially for imports. A 10 percent increase in exports is associated with a 3.9 percent increase in labor incomes over the full period 1995-2018. This implies that while exports have the potential to expand the number of jobs within a sector, they raise incomes more strongly. One explanation could be the productivity gains associated with exports which increase the average wage rate and thus total labor value added. More strikingly, a 10 percent increase in intermediate imports is on average correlated with

> 11 We use the Kleibergen-Paap test statistic and reject the hypothesis of weak instruments if the test statistic exceeds 10, following the rule of thumb by Staiger and Stock (1997). 12 Importantly, this only takes into account direct employment effects within sectors but does not consider indirect effects through job creation in supplying sectors, implying even larger employment potential of exports through supply-chain linkages. 13 The results of this extended analysis are available upon request.

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