The Dynamic Effects of State-Dependent Labor Adjustment Cost: Evidence from Brazil’s FGTS Policy

61 Pages Posted: 6 Dec 2018 Last revised: 2 Jan 2020

See all articles by Calebe Figueiredo

Calebe Figueiredo

University of North Carolina (UNC) at Chapel Hill, College of Arts and Sciences, Department of Economics, Students

Neville Francis

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: October 20, 2018

Abstract

The most recent recessions in Brazil pose a challenge for current business cycle models due to a key piece of legislation that causes labor to adjust in unconventional ways. We propose a two-sector model that resembles the formal and informal sectors in Brazil. While the formal sector is subject to a termination penalty inspired by said legislation, the informal sector makes labor decisions in a frictionless environment. Our model accurately predicts that recessions preceded by long expansions impact labor levels more severely than downturns following shorter economic booms. Importantly, the state dependence property of our legislative adjustment cost allows us to replicate the delay between the beginning of an economic downturn and the trough in the formal-sector labor level, a unique feature observed after the 2014-2016 depression in Brazil.

Keywords: Labor adjustment cost, Informal labor markets, Bayesian DSGE

JEL Classification: E24, E26

Suggested Citation

Figueiredo, Calebe and Francis, Neville, The Dynamic Effects of State-Dependent Labor Adjustment Cost: Evidence from Brazil’s FGTS Policy (October 20, 2018). Available at SSRN: https://ssrn.com/abstract=3272449 or http://dx.doi.org/10.2139/ssrn.3272449

Calebe Figueiredo

University of North Carolina (UNC) at Chapel Hill, College of Arts and Sciences, Department of Economics, Students ( email )

Chapel Hill, NC 27599
United States
919 951 5709 (Phone)

HOME PAGE: http://https://econ.unc.edu/grads/calebe-figueiredo/

Neville Francis (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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