Emerging Market Business Cycles: The Role of Labor Market Frictions

Abstract

Emerging economies are characterized by higher variability of consumption and real wages relative to output and a strongly countercyclical current account. A small open economy model with search-matching frictions and countercyclical interest rate shocks can account for these regularities. Search-matching frictions affect permanent income, and increase future employment uncertainty, heightening workers' incentives to save and generating a greater response of consumption and the current account. The greater consumption response feeds into larger fluctuations in workers' willingness to work, while interest rate shocks lead to variations in firms' willingness to hire; both of these outcomes contribute to highly variable wages.JEL codes: E24, E44, F41, F43

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

“…5 Table A.1 in the appendix presents the full list of countries used in the robustness check using employment data. 6 Compared to advanced economies, developing economies are characterized by smaller relative variability of both hours worked and employment to output, which corroborates the empirical stylized fact in Neumeyer and Perri (2005) and Boz, Durdu, and Li (2015) labor and for consistency with earlier structural VAR analyses on advanced economies, such as Christiano, Eichenbaum, and Vigfusson (2004), Galí (2004), andBasu, Fernald, andKimball (2006).…”

“…5 We do not report other business cycle properties here. See Boz, Durdu, and Li (2015) and Miyamoto and Nguyen (2017) for the updated statistics.…”

“…While there have been extensive studies on the business cycle properties of developing economies, including higher variability in consumption relative to output, and countercyclical net exports and interest rates (see Neumeyer and Perri (2005) and Aguiar and Gopinath (2007) among others), study on the labor market dynamics of the developing economies has been rare. 1 One exception is Boz, Durdu, and Li (2015), who showed that the business cycle properties of key labor market variables (i.e., real earnings, employment, and hours worked) in developing economies are also different from those in developed economies. This paper aims to fill this gap in the literature by focusing on the labor market dynamics under the technology shocks in developing economies.…”

Technology and Demand Drivers of Productivity Dynamics in Developed and Emerging Market Economies

“…However, many of the productivity surges observed in advanced economies and EMDEs have not been associated with falling employment or consumer prices. While productivity and investment often co-move in both advanced economies and EMDEs over the business-cycle they are usually accompanied by rising prices and employment (Boz et al, 2015;Stock and Watson, 1999). In addition, the SVAR-identified technology shocks explain three-quarters of the variation of labor productivity over long-horizons, leaving a role for other shocks to also generate persistent changes in labor productivity.…”

Can RBC Models Explain Business Cycles in Korea?

“…The reason I do not consider the labor market in this paper is that it is known that the simple RBC model with a growth shock presented in Subsection 3.1 does not satisfactorily explain the stylized facts in emerging-economy labor markets: large fluctuations in wages and subdued fluctuations in employment. Refer to Bahng (2012) and Boz et al (2012) for the detailed discussions and references therein. Another reason I do not include work hours in the utility function is to remove the interaction between consumption and labor.…”