The effect of trade sanctions on employment through total factor productivity

This paper examines the effect of trade sanctions on employment through their impact on total factor productivity by using Iranian industrial manufacturing data covering 7 years before and 7 years after the sanction. The first part of this study shows that the trade sanctions significantly reduced all industries’ total factor productivity both directly by reducing industries’ technology expenditure and indirectly by shrinking the magnitude of the effect of technology expenditure on total factor productivity. The second part of this study displays that there was remarkable job destruction, most notably in domestically active industries, during the sanctions years. Interestingly, the results from estimating a dynamic labor demand function depict that the job destruction during the sanction period can not be associated with the negative impact of trade sanctions on industries’ total factor productivity. In contrast, the results show that each 1% reduction in industries’ total factor productivity, which was indeed about 3.8% on average during the sanctions years, increases their employment by about 0.8% in the short-run and has no significant impact in the long-run.