Trade and employment volatility of firms during the global financial crisis and post-crisis

Abstract

There exists a theoretically ambiguous relationship between employment volatility and trade. Using a 2006–2015 firm-level unbalanced panel dataset for South Korea, this study investigates whether the globalization of firms transmits foreign shocks to domestic employment volatility and examines how foreign shocks that affect domestic employment are transmitted during both a crisis period and a post-crisis period. My empirical findings show that foreign demand shocks to domestic employment are transmitted through inter-firm exports during a post-crisis period window, while foreign demand and supply shocks on domestic employment are transmitted through intra-firm two-way trade and intra-firm imports during a crisis period window. These results show the asymmetric response of intra-firm trade and inter-firm trade to shocks during the crisis and post-crisis periods. Therefore, these results imply structural changes to the transmission channels of foreign shocks that impact domestic employment volatility after the crisis period. In addition, foreign direct investment has a positive effect on employment volatility. This implies higher employment volatility if a firm has overseas production plants, as presence abroad prompts the firm to substitute foreign workers for domestic workers. These findings may have significant implications for policy makers seeking to identify sources of labor market instability.