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Financial Crises and Labor Market Turbulence

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Abstract

Financial crises cause a significant reallocation of labor as relative prices change drastically and economies confront a variety of shocks. Using household survey data for Mexico, we show that gross and net labor flows between industries and occupations increase substantially during the 1994-95 crisis. We also find significant wage losses associated with moving: individuals who switch industry or occupation during the crisis lose more than 10% of hourly earnings compared to similar workers who do not move. This suggests that crises are times of labor market turbulence, during which human capital is destroyed in the process of directing workers to different economic activities. This phenomenon could account for a significant part of the large fall in TFP that typically accompanies crises in emerging economies. We describe a map from our earnings estimates to aggregate TFP and show that productivity losses associated with occupation and industry changes can explain about 40% of the observed fall in TFPin Mexico in 1995.

Suggested Citation

  • Sangeeta Pratap & Erwan Quintin, 2010. "Financial Crises and Labor Market Turbulence," Economics Working Paper Archive at Hunter College 428, Hunter College Department of Economics.
    • Handle: RePEc:htr:hcecon:428
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    Cited by:

    1. Meza, Felipe & Urrutia, Carlos, 2011. "Financial liberalization, structural change, and real exchange rate appreciations," Journal of International Economics, Elsevier, vol. 85(2), pages 317-328.
    2. 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.
    3. Thomas Marois, 2014. "Historical Precedents, Contemporary Manifestations," Review of Radical Political Economics, Union for Radical Political Economics, vol. 46(3), pages 308-330, September.
    4. Cabral, René & Mollick, André Varella, 2017. "Mexican real wages and the U.S. economy," Economic Modelling, Elsevier, vol. 64(C), pages 141-152.
    5. Sheida Teimouri, 2015. "Currency crises and dynamics of real wages," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(2), pages 377-403, May.
    6. Tavares, Tiago, 2019. "Labor market distortions under sovereign debt default crises," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    7. Blanton, Robert G. & Blanton, Shannon Lindsey & Peksen, Dursun, 2015. "Financial Crises and Labor: Does Tight Money Loosen Labor Rights?," World Development, Elsevier, vol. 76(C), pages 1-12.
    8. Dong, Ding & Liu, Zheng & Wang, Pengfei, 2025. "Turbulent business cycles," Journal of Monetary Economics, Elsevier, vol. 155(C).
    9. MURSA Gabriel Claudiu & IACOBUȚĂ Andreea-Oana & ZANET Maria, 2018. "An Eu Level Analysis Of Several Youth Unemployment Related Factors," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 13(3), pages 105-117, December.
    10. Boeri, Tito & Jimeno, Juan F., 2016. "Learning from the Great Divergence in unemployment in Europe during the crisis," Labour Economics, Elsevier, vol. 41(C), pages 32-46.
    11. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R., 2015. "Financial Frictions, Financial Shocks and Unemployment Volatility," CEPR Discussion Papers 10648, C.E.P.R. Discussion Papers.
    12. Tavares, Tiago, 2015. "Labor Market Distortions under Sovereign Default Crises," MPRA Paper 66964, University Library of Munich, Germany.
    13. Mr. Ruy Lama & Carlos Urrutia, 2011. "Employment Protection and Business Cycles in Emerging Economies," IMF Working Papers 2011/293, International Monetary Fund.

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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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