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Search Frictions, Financial Frictions and Labour Market Fluctuations in Emerging Markets

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  • Sumru Altug
  • Serdar Kabaca

Abstract

This paper examines the role of the extensive and intensive margins of labour input in the context of a business cycle model with a financial friction. We document significant variation in the hours worked per worker for many emerging-market economies. Both employment and hours worked per worker are positively correlated with each other and with output. We show that a search-theoretic context in a small open-economy model requires a small income effect to explain these regularities at the expense of a smaller wage response. On the other hand, introducing a financial friction in the form of a working capital requirement can explain the observed movements of labour market variables such as employment and hours worked per worker, as well as other distinguishable business cycle characteristics of emerging economies. These include highly volatile and cyclical real wages, labour share, and consumption.

Suggested Citation

  • Sumru Altug & Serdar Kabaca, 2014. "Search Frictions, Financial Frictions and Labour Market Fluctuations in Emerging Markets," Staff Working Papers 14-35, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-35
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    Cited by:

    1. Serdar Kabaca, 2011. "Labor Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing," Koç University-TUSIAD Economic Research Forum Working Papers 1122, Koc University-TUSIAD Economic Research Forum.
    2. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).
    3. Dániel Baksa & István Kónya, 2021. "Convergence stories of post‐socialist Central‐Eastern European countries," Manchester School, University of Manchester, vol. 89(3), pages 239-258, June.
    4. Luke Lin & Wen-Yuan Lin, 2018. "Does the major market influence transfer? Alternative effect on Asian stock markets," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1169-1200, May.
    5. U. Michael Bergman & Michael Hutchison, 2020. "Fiscal procyclicality in emerging markets: The role of institutions and economic conditions," International Finance, Wiley Blackwell, vol. 23(2), pages 196-214, August.

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    More about this item

    Keywords

    Business fluctuations and cycles; Labour markets; Development economics; International topics; Interest rates;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General

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