International Capital Mobility and Unemployment Dynamics: Empirical Evidence from OECD Countries

We use a panel of 20 OECD countries over a 30-year period to investigate empirically the implications of international capital mobility for aggregate unemployment dynamics. To this aim, we employ standard regression analysis and dynamic simulations to illustrate the channels through which international capital mobility impacts unemployment adjustments to productivity shocks and quantify its effect on unemployment volatility. We find that capital mobility plays a significant role in generating unemployment responses to idiosyncratic productivity shocks which are wider but less persistent. Moreover, the empirical evidence suggests that the responsiveness effect dominates the persistence effect, implying that higher international capital mobility increases unemployment volatility. The effect is not negligible. Montecarlo simulations of the model show that moving from a close economy to an open economy scenario causes the standard deviation of unemployment to increase by around 26 percent.