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Instrumental Variables and Causal Mechanisms

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Unpacking the Effect of Trade on Workers and Voters 

In this paper we pursue an instrumental variable (IV) strategy to study the effect of trade exposure on voters’ support for populist parties, using German data from 1987– 2009. We find that support for extreme right parties increased in regions that faced more import competition. These regions also experienced significant labor market turmoil. The focus of this paper is on the extent to which trade exposure polarized voters because it caused labor market turmoil. To answer this question we propose a new framework for mediation analysis in IV settings. Our main finding is that the effect of import exposure on labor markets entirely explains its polarizing effect on voters. Our empirical framework may be useful in a broad range of empirical appli- cations studying causal mechanisms in IV settings.

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