Employment Protection and Business Cycles in Emerging Economies

Author/Editor: Ruy Lama ; Carlos Urrutia
Publication Date: December 01, 2011
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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(s): Economic models | Economic recession | Emerging markets | External shocks | Labor markets

Author's Keyword(s): Employment protection | Matching frictions | Small open economy | Great recession.
Publication Date: December 01, 2011
ISBN/ISSN: 9781463927271/1018-5941 Format: Paper
Stock No: WPIEA2011293 Pages: 40
US$18.00 (Academic Rate:
US$18.00 )
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