Raddatz (2005) studies volatility at the sector level using a version of the UNIDO database,
and finds that financial development matters more in industries with higher liquidity needs.
Column (8) includes the interaction of the Raddatz liquidity needs measure with a country’s
financial development, where the latter is proxied by private credit as a share of GDP com-
ing from the Beck, Demirguc-Kunt and Levine (2000) database. The coefficient on trade
openness remains significant at 1% level. The negative coefficient on the interaction term in
column (8) corresponds to Raddatz (2005).15 Appendix Table A4 repeats these robustness
checks in the panel specifications, and reaches the same conclusion.
3.1.1 Sector-Level Volatility in Price and Quantity per Worker
In addition to total output and employment, the UNIDO database also reports sector-level
quantity indices. We can therefore construct annual growth rates of the quantity of output
per worker, for each sector, and calculate the same volatility measure as we did for output
per worker.16 Furthermore, given that output per worker equals price times quantity per
worker, it follows that we can back out the growth rate of the sector-specific price index
by subtracting the growth rate of quantity per worker from the growth rate of output per
worker.17 We then calculate the volatility measures for the sector-specific price index.
This rough separation of the growth rates of output per worker into the growth rate of
quantity and of price does not help us identify the channels through which trade openness
affects volatility. Indeed, no matter what the shock, we would expect both the price and the
quantity to move. Nonetheless, examining the effect of trade on quantities and prices serves
as a further robustness check on our results, by showing that trade affects the volatility
of both. Table 3 presents the baseline volatility regressions for quantity per worker and
price. The openness coefficient is positive and significant for both left-hand side variables
across all specifications. Furthermore, the quantity-openness elasticity is greater than the
price-openness one.18
15 We also interacted the Raddatz’s measure with country fixed effects, and the results were unchanged.
Note that doing so is a more general specification than using the interaction with financial development.
16 Another quantity-based measure we used to check for robustness is simply the growth rate of employ-
ment. The effect of trade on the volatility of employment is equally significant as its effect on our headline
measure, output per worker. The full set of results is available upon request.
17Namely, if OUTPUTict is nominal output, and INDPRODict is the index number
of industrial production, then the sector-specific growth rate of prices is GrowthPict =
log((OUTPUTict/OUTPUTic(t-1))/(INDPRODict/INDPRODic(t-1))).
18 Panel estimations are similar to the cross-sectional ones, and are thus omitted to conserve space. They
are available from the authors upon request.
11