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Labour Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing

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  • Serdar Kabaca

Abstract

This paper contributes to the literature by documenting labour income share fluctuations in emerging-market economies and proposing an explanation for them. Time-series data indicate that emerging markets differ from developed markets in terms of changes in the labour share over the business cycle. Labour share is more volatile in emerging markets and is procyclical, especially in countries facing countercyclical interest rates. In contrast, labour share in developed markets is more stable and slightly countercyclical. A frictionless small open-economy real business cycle model cannot account for these facts. I introduce working capital into this model, which generates liquidity need for labour payments. The main result is that the behaviour of the cost of borrowing can predict the right sign of the co-movement between labour share and output in both country groups, and can partly be responsible for the volatility of labour share. I also show that imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labour share but also help better explain some of the striking business cycle regularities in emerging markets, such as highly volatile consumption, strongly procyclical investment and countercyclical net exports.

Suggested Citation

  • Serdar Kabaca, 2014. "Labour Share Fluctuations in Emerging Markets: The Role of the Cost of Borrowing," Staff Working Papers 14-47, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-47
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    1. repec:mes:emfitr:v:53:y:2017:i:1:p:128-149 is not listed on IDEAS
    2. Sumru Altug & Serdar Kabaca & Meltem Poyraz, 2011. "Search Frictions, Financial Frictions and Labor Market Fluctuations in Emerging Economies," Koç University-TUSIAD Economic Research Forum Working Papers 1136, Koc University-TUSIAD Economic Research Forum.
    3. Sumru Altug & Serdar Kabaca, 2017. "Search Frictions, Financial Frictions, and Labor Market Fluctuations in Emerging Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(1), pages 128-149, January.

    More about this item

    Keywords

    Business fluctuations and cycles; Development economics; Interest rates; International topics; Labour markets;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • 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

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