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Employment Protection and Business Cycles in Emerging Economies

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  • 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. Ricardo Lagos, 2006. "A model of TFP," Staff Report, Federal Reserve Bank of Minneapolis 345, Federal Reserve Bank of Minneapolis.
  2. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 69-102.
  3. Pratap, Sangeeta & Quintin, Erwan, 2011. "Financial crises and labor market turbulence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(6), pages 601-615.
  4. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2007. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," Working Paper Series 214, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2011.
  5. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report, Federal Reserve Bank of Minneapolis 335, Federal Reserve Bank of Minneapolis.
  6. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics.
  7. Ruy Lama, 2011. "Accounting for Output Drops in Latin America," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 295-316, April.
  8. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers, Rutgers University, Department of Economics 200115, Rutgers University, Department of Economics.
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  14. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  15. Marcelo Veracierto, 2008. "Establishments Dynamics and Matching Frictions in Classical Competitive Equilibrium," 2008 Meeting Papers 505, Society for Economic Dynamics.
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  17. 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. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  20. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  21. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, American Economic Association, vol. 100(5), pages 1941-66, December.
  22. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 1(1), pages 280-97, January.
  23. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(6), pages 2277-2292, November.
  24. Simon Burgess & Helene Turon, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies – A Comment," Bristol Economics Discussion Papers 05/573, Department of Economics, University of Bristol, UK.
  25. Lee E. Ohanian, 2010. "The Economic Crisis from a Neoclassical Perspective," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(4), pages 45-66, Fall.
  26. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
  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, Centro de Investigacion Economica, ITAM 1106, Centro de Investigacion Economica, ITAM.
  2. Craighead, William D., 2014. "Monetary rules and sectoral unemployment in open economies," Journal of Macroeconomics, Elsevier, Elsevier, vol. 40(C), pages 277-292.
  3. Sangeeta Pratap & Carlos Urrutia, 2012. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 336-358, July.

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