Trade and labor market dynamics: What do we learn from the data?

•The paper studies the short- and long-run effects of trade on labor market dynamics.•Unemployment reduces mainly through lower job-separations.•The job-finding rate increases only with a time lag.•Job-to-job transitions may be crucial for trade models with search frictions.

Recent studies in international trade highlight potential labor market effects of trade liberalization through firm selection. Our empirical study contributes to this recent strand of literature by studying the short- and long-run effects of trade on unemployment in Germany. We employ a structural VAR approach in order to disentangle the total effect of trade on unemployment into job-findings and separations. Our results indicate that the unemployment effect mainly works through a drop in the job-separation rate, which can be explained by job-to-job transitions from contracting towards expanding firms. Thus, our results reinforce the importance of endogenous separations and on-the-job search in models of trade, heterogeneous firms and labor market frictions.