Asymmetric Labor Market Responses to External Demand Fluctuations: Evidence from Latin America

This paper examines how external demand fluctuations transmit asymmetrically to labor market outcomes in Latin America a region where structural informality and institutional rigidity shape the margins of employment adjustment. Using a balanced panel of 16 countries from 2001 to 2019, we estimate asymmetric impulse-response functions via local projections with long differences, disaggregating labor market responses by employment category following the ICSE-93 classification. Results reveal a fundamental asymmetry: wage employment does not respond to positive external demand episodes but contracts significantly during negative ones, while self-employment exhibits a countercyclical pattern declining during expansions and expanding as a buffer during downturns. Unemployment plays a minimal role in the adjustment process. Subgroup analyses document substantial heterogeneity within the region: economies with more flexible labor markets and higher trade openness adjust faster and through formal employment margins, while less flexible and more closed economies rely predominantly on self-employment, with more persistent effects. These findings highlight labor market duality and institutional rigidity as the primary conditioners of asymmetric employment adjustment to external demand fluctuations in Latin America, with implications for the design of policies aimed at building more resilient and inclusive labor markets.