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Informal Employment and Business Cycles in Emerging Economies: The Case of Mexico

Author

Listed:
  • Andres Fernandez

    (Inter-American Development Bank)

  • Felipe Meza

    (ITAM)

Abstract

We document how informal employment in Mexico is countercyclical, lags the cycle and is negatively correlated to formal employment. This contributes to explaining why total employment in Mexico displays low cyclicality and variability over the business cycle when compared to Canada, a developed economy with a much smaller share of informal employment. To account for these empirical findings, we build a business cycle model of a small, open economy that incorporates formal and informal labor markets and calibrate it to Mexico. The model performs well in terms of matching conditional and unconditional moments in the data. It also sheds light into the channels through which informal economic activity may affect business cycles. Introducing informal employment into a standard model amplifies the effects of productivity shocks. This is linked to productivity shocks being imperfectly propagated from the formal to the informal sector. It also shows how imperfect measurement of informal economic activity in national accounts can translate into stronger variability in aggregate economic activity. (Copyright: Elsevier)

Suggested Citation

  • Andres Fernandez & Felipe Meza, 2015. "Informal Employment and Business Cycles in Emerging Economies: The Case of Mexico," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 381-405, April.
  • Handle: RePEc:red:issued:12-21
    DOI: 10.1016/j.red.2014.07.001
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    References listed on IDEAS

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    Cited by:

    1. Solis-Garcia, Mario & Xie, Yingtong, 2018. "Measuring the size of the shadow economy using a dynamic general equilibrium model with trends," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 258-275.
    2. Epstein, Brendan & Finkelstein Shapiro, Alan, 2018. "Financial Development, Unemployment Volatility, and Sectoral Dynamics," MPRA Paper 88693, University Library of Munich, Germany.
    3. Hassan, M. Kabir & Ngene, Geoffrey M. & Yu, Jung-Suk, 2015. "Credit default swaps and sovereign debt markets," Economic Systems, Elsevier, vol. 39(2), pages 240-252.
    4. repec:eee:deveco:v:133:y:2018:i:c:p:66-83 is not listed on IDEAS
    5. Liliana Rojas-Suárez & José María Serena, 2015. "Changes in funding patterns by Latin American banking systems:how large? how risky?," Working Papers 1521, Banco de España;Working Papers Homepage.
    6. Ghosh, Amit, 2017. "How does banking sector globalization affect economic growth?," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 83-97.
    7. repec:eee:inecon:v:112:y:2018:i:c:p:123-133 is not listed on IDEAS
    8. Gustavo Leyva & Carlos Urrutia, 2018. "Informality, Labor Regulation, and the Business Cycle," 2018 Meeting Papers 587, Society for Economic Dynamics.
    9. Chad P. Bown & Daniel Lederman & Samuel Pienknagura & Raymond Robertson, 2017. "Better Neighbors," World Bank Publications, The World Bank, number 25736.
    10. Epstein, Brendan & Finkelstein Shapiro, Alan & Gonzalez Gomez, Andres, 2018. "Global Financial Risk, Domestic Financial Access, and Unemployment Dynamics," MPRA Paper 88692, University Library of Munich, Germany.
    11. repec:eee:deveco:v:133:y:2018:i:c:p:346-374 is not listed on IDEAS
    12. Restrepo-Echavarria, Paulina, 2014. "Macroeconomic volatility: The role of the informal economy," European Economic Review, Elsevier, vol. 70(C), pages 454-469.
    13. Atesagaoglu, Orhan Erem & Elgin, Ceyhun, 2015. "Cyclicality of labor wedge and informal sector," Economics Letters, Elsevier, vol. 136(C), pages 141-146.
    14. Finkelstein Shapiro, Alan & Mandelman, Federico S., 2016. "Remittances, entrepreneurship, and employment dynamics over the business cycle," Journal of International Economics, Elsevier, vol. 103(C), pages 184-199.
    15. Carvallo, Oscar & Kasman, Adnan, 2017. "Convergence in bank performance: Evidence from Latin American banking," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 127-142.
    16. repec:eee:jimfin:v:78:y:2017:i:c:p:44-63 is not listed on IDEAS
    17. Solis-Garcia, Mario & Xie, Yingtong, 2017. "Is GDP more volatile in developing countries after taking the shadow economy into account? Evidence from Latin America," MPRA Paper 78965, University Library of Munich, Germany.
    18. Villarreal, Francisco G., 2016. "Monetary policy and inequality under household heterogeneity and incomplete markets," MPRA Paper 82780, University Library of Munich, Germany.
    19. Claudio Cesaroni, 2017. "Optimal Long-Run Inflation and the Informal Economy," Bank of Lithuania Working Paper Series 46, Bank of Lithuania.
    20. Voskoboynikov, Ilya B., 2017. "Structural change, expanding informality and labour productivity growth in Russia," BOFIT Discussion Papers 18/2017, Bank of Finland, Institute for Economies in Transition.
    21. repec:eee:jmacro:v:55:y:2018:i:c:p:96-116 is not listed on IDEAS

    More about this item

    Keywords

    Emerging economies; Business cycles; Informal employment;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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