Economic globalization and unemployment: Evidence from high‐, middle‐ and low‐income countries

Abstract

This study intends to empirically evaluate the effects of economic globalization and its components (i.e. trade and financial openness) on unemployment in high‐, middle‐ and low‐income countries from 1991 to 2020. Further, it considers real GDP per capita (sectoral divisions of income, i.e. agriculture, industry and service sector) and urbanization as control variables in the unemployment function. On the empirical front, this study employs the Panel Dynamic Simulated ARDL model and the Kernel‐Based Regularized Least Squares for long‐run influence estimations. The emanating outcome of these analyses states that economic globalization destroys employment opportunities for low‐income countries as it enhances unemployment in the long run. However, in high‐ and middle‐income countries, economic globalization creates employment, which implies reducing unemployment in the long run. The result also indicates that trade and financial openness destroy employment opportunities in low‐income countries. Although trade openness in middle‐income countries shows the same effect, financial openness does not mimic the same. For high‐income countries, trade openness reduces unemployment, but financial openness fosters it. Therefore, these findings indicate that to keep unemployment at a low level, policies related to the opening up of the economy in terms of factor mobility, offshoring, outsourcing and international trade need to be implemented in low‐income countries. Moreover, a similar consideration is needed for high and middle‐income countries to avoid faraway repercussions on unemployment due to becoming a peripheral country.