Employment Protection and Business Cycles in Emerging Economies

Author/Editor:

Ruy Lama ; Carlos Urrutia

Publication Date:

December 1, 2011

Electronic Access:

Free Full Text (PDF file size is 962 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment.

Series:

Working Paper No. 11/293

Subject:

English

Publication Date:

December 1, 2011

ISBN/ISSN:

9781463927271/1018-5941

Stock No:

WPIEA2011293

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

40

Please address any questions about this title to publications@imf.org