Dual Labor Markets and Business Cycles
Federal Reserve Bank of San Francisco Working Paper No. 2006-36
27 Pages Posted: 6 Aug 2007
Date Written: September 2005
In this paper, we model a dynamic general equilibrium model of a small open developing economy. We model labor markets as including both formal and informal urban employment as well as rural employment. We find that modelling dual labor markets helps explain why output in developing economies may fall even as labor inputs remain constant during financial crises. An external financial shock may lead to a reallocation of labor from productive formal sectors of the economy to less productive informal sectors.
Keywords: bank balance sheet channel, foreign currency debt, sticky prices, exchange rate depreciation
JEL Classification: F3, F4
Suggested Citation: Suggested Citation