Emerging Market Business Cycles: The Role of Labor Market Frictions
52 Pages Posted: 7 Nov 2012
Date Written: October 2012
Emerging economies are characterized by higher consumption and real wage variability relative to output and a strongly countercyclical current account. A real business cycle model of a small open economy that embeds a Mortensen-Pissarides type of search-matching frictions and countercyclical interest rate shocks can jointly account for these regularities. In the face of countercyclical interest rate shocks, search-matching frictions increase future employment uncertainty, improving workers' incentive to save and generating a greater response of consumption and the current account. Higher consumption response in turn feeds into larger fluctuations in the workers' bargaining power while the interest rates shocks lead to variations in the firms' willingness to hire; both of which contribute to a highly variable real wage.
Keywords: Business cycles, Emerging markets, Labor markets, Productivity, Economic models, emerging markets, labor markets, business cycles, search frictions, unemployment, employment, unemployment rate, bargaining, unemployed, number of employees, employment data, unemployment insurance, future employment, total employment, unemployed worker, unemployed workers, unemployment rates, public sector employment, job creation, unemployment increases, unemployment spell, employment status, employment statistics, unemployment statistics, formal employment, employment relationship, equilibrium unemployment, employment share, high unemployment rate, unemployment risk, future employment prospects, beveridge cur
JEL Classification: E24, E44, F41, F43
Suggested Citation: Suggested Citation