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Employment Protection and Business Cycles in Emerging Economies

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Author Info

  • Ruy Lama
  • Carlos Urrutia

Abstract

We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/293.

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Length: 40
Date of creation: 01 Dec 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/293

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Keywords: Economic models; Economic recession; Emerging markets; External shocks; Labor markets; employment; labor market; jobs; employment protection; labor supply; unemployed; unemployment; job creation; aggregate employment; labor efficiency; job destruction; labor force; labor flows; employment volatility; unemployed workers; labor market tightness; unemployment rate; labor market policies; labor market distortions; unemployed worker; labor regulation; informal labor markets; labor adjustment; employment opportunity; labor market regulations; effect on employment; equilibrium unemployment; beveridge curve; self-employment; labor regulations; job vacancies; labour; total labor force; job flows; labor market regulation; labor organization; job security; job security regulation; labor market outcomes; labour market; flexibility of labor markets;

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References

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers 625, Federal Reserve Bank of Minneapolis.
  2. Ruy Lama, 2009. "Accounting for Output Drops in Latin America," IMF Working Papers 09/67, International Monetary Fund.
  3. Bosch, Mariano & Maloney, William, 2008. "Cyclical movements in unemployment and informality in developing countries," Policy Research Working Paper Series 4648, The World Bank.
  4. Marcelo Veracierto, 2008. "Establishments Dynamics and Matching Frictions in Classical Competitive Equilibrium," 2008 Meeting Papers 505, Society for Economic Dynamics.
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  6. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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  8. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  9. Pablo A. Neumeyer & Fabrizio Perri, 2001. "Business Cycles in Emerging Economies:The Role of Interest Rates," Working Papers 01-12, New York University, Leonard N. Stern School of Business, Department of Economics.
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  13. Bosch, Mariano & Maloney, William F., 2007. "Gross Worker Flows in the Presence of Informal Labor Markets: Evidence from Mexico, 1987-2002," IZA Discussion Papers 2864, Institute for the Study of Labor (IZA).
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  19. Mark Aguiar & Gita Gopinath, 2004. "Emerging Market Business Cycles: The Cycle is the Trend," NBER Working Papers 10734, National Bureau of Economic Research, Inc.
  20. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  21. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
  22. Ricardo Lagos, 2006. "A model of TFP," Staff Report 345, Federal Reserve Bank of Minneapolis.
  23. Richard Rogerson & Johanna Wallenius, 2007. "Micro and Macro Elasticities in a Life Cycle Model With Taxes," NBER Working Papers 13017, National Bureau of Economic Research, Inc.
  24. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  25. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  26. Lee E. Ohanian, 2010. "The Economic Crisis from a Neoclassical Perspective," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 45-66, Fall.
  27. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank.
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Citations

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Cited by:
  1. Andres Fernandez & Felipe Meza, 2011. "Labor, Output and Consumption in Business Cycle Models of Emerging Economies: A Comment," Working Papers 1106, Centro de Investigacion Economica, ITAM.
  2. Sangeeta Pratap & Carlos Urrutia, 2011. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Working Papers 1104, Centro de Investigacion Economica, ITAM.
  3. William D. Craighead, 2012. "Monetary Rules and Sectoral Unemployment in Open Economies," Wesleyan Economics Working Papers 2012-001, Wesleyan University, Department of Economics.

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