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Labor Market Dynamics under Technology Shocks: The Role of Subsistence Consumption

Author

Listed:
  • Sangyup Choi

    (Yonsei University)

  • Myungkyu Shim

    (Yonsei University)

Abstract

This paper establishes new stylized facts about labor market dynamics in developing economies and proposes a simple theory to explain them. We first show that the response of hours worked and employment to a technology shock—identified by a structural VAR model with long-run restrictions—is smaller in developing economies than in advanced economies. We then present the evidence that the level of PPP-adjusted income per capita—a proxy for the importance of subsistence consumption—is strongly and robustly correlated with the relative variability of employment and consumption to output across countries, while other structural characteristics are not. We argue that an RBC model augmented with subsistence consumption can account for the several salient features of business cycle fluctuations in developing economies, including their distinct labor market dynamics under technology shocks.

Suggested Citation

  • Sangyup Choi & Myungkyu Shim, 2020. "Labor Market Dynamics under Technology Shocks: The Role of Subsistence Consumption," GRU Working Paper Series GRU_2020_002, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2020_002
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    Keywords

    Business cycles; Developing economies; Subsistence consumption; Labor market dynamics; In- come effect; Long-run restrictions;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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