In an increasingly integrated world economy, national borders have become less of a constraint on firms as they set out to determine the optimal geographic locations for production activities. The resulting shift in the international distribution of production has been shown to have important implications for both trade and employment patterns. Indeed, there is now a well established theoretical trade literature investigating the effects of improved economic integration on unemployment using the labor market frictions approach. Moreover, recent empirical evidence suggests that international trade may generate institutional spillovers through which domestic labor market policy influences the labor market outcomes of trade partners. Much less is known, however, about how these institutional spillovers affect the relationship between unemployment and economic growth when firms are free to shift their production activities across borders. As regional economic policy tends to emphasize both employment and innovation-based growth, while at the same time supporting the geographic concentration of production, further research is needed to shed light on how production location patterns impact unemployment rates and economic growth through institutional spillovers. To this end, this paper constructs a two-country model of international trade to study how labor market frictions affect industry location patterns, unemployment rates, and fully endogenous productivity growth. We show that when the large country offers subsidies to labor search costs or reduces unemployment benefits, the domestic unemployment rate falls, causing greater industry concentration and faster productivity growth, but raising the unemployment rate of the smaller country. When similar labor market policies are implemented in the small country, however, the resulting fall in domestic unemployment leads to lower industry concentration and slower productivity growth, while lowering the unemployment rate of the larger country. We also consider the implications of labor market policies for national welfare levels.