Instrumental Variables and Causal Mechanisms: Unpacking The Effect of Trade on Workers and Voters
We investigate the impact of import exposure on regional labor markets and voting behavior. Using a standard IV model, we find in German data from 1987–2009 that import exposure caused both significant labor market adjustments and increasing support for extreme-right parties. Our focus is on the question that naturally follows: to what extent was the effect of import exposure on labor markets responsible for the political response? The standard IV model cannot answer this question. We propose a new framework for mediation analysis in IV settings that can, while making minimal additional assumptions on the causal relations between the unobserved variables. We find that the effect of import exposure on voting that is mediated by labor market adjustments is larger than the total effect of import exposure on voting, being partly offset by moderating channels that do not operate through labor markets. A supplementary analysis of individual-level data corroborate our findings. Our estimation framework is general and enables identification of previously unidentified causal effects in a broad range of empirical questions in which one observed outcome of an instrumented treatment in turn influences another.
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Document Object Identifier (DOI): 10.3386/w23209
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