Economic Integration and Unemployment in Central America

This paper quantifies the interdependence in national labor markets in Central America, a topic that has not received attention in the economic integration literature. Two sets of panel data are constructed: one formed by the aggregation of annual time series data from Costa Rica and El Salvador, and another with data from Honduras and Nicaragua. These two sets of data are used to estimate a Var model that includes the variables economic growth, investment, and unemployment rates; another Var is estimated including the change in export ratios in place of the investment rates. The results indicate that there are strong cross border effects in the sense that national unemployment rates drop in response to shocks to economic growth, investment and export ratios in other countries, and in some cases the induced fall in unemployment is larger than the one resulting from domestic variables. The paper ends with a series of considerations on the design of regional stabilization policies.