Employment Protection and Business Cycles in Emerging Economies

December 1, 2011

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Format: Chicago

Ruy Lama, and Carlos Urrutia. Employment Protection and Business Cycles in Emerging Economies, (USA: International Monetary Fund, 2011) accessed December 22, 2024

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.

Subject: Business cycles, Employment, Labor, Productivity, Total factor productivity

Keywords: Interest rate, Labor market, Open economy, Separation cost, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/293
Stock No:

WPIEA2011293
ISBN:

9781463927271
ISSN:

1018-5941

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