Asymmetric Business Cycles in Segmented Labour Markets

41 Pages Posted: 18 Dec 2020

See all articles by Srinivasan Murali

Srinivasan Murali

Indian Institute of Management (IIMB), Bangalore - Department of Economics and Social Sciences

Abhishek Naresh

IIM Bangalore

Jong Kook Shin

Korea University - Sejong Campus

Chetan Subramanian

Indian Institute of Management (IIMB), Bangalore

Date Written: December 17, 2020

Abstract

We document the presence of asymmetric business cycles in both regular and contract labour markets in India and investigate the role of nominal wage rigidities and labour adjustment costs in accounting for these asymmetries. Using data from Annual Survey of Industries, we find that (i) the growth rate of output is negatively skewed, (ii) the growth of regular employment is negatively skewed while that of contract employment is positively skewed, (iii) the nominal wage growth of regular workers is positively skewed while that of contract workers is negatively skewed. We show that a standard business cycle model augmented with asymmetric wage adjustment cost for both regular and contract labour coupled with symmetric labour adjustment cost for regular workers does a good job of explaining the asymmetries in both output and employment cycles. We also find that the presence of contract labour relaxes the constraint of downward nominal wage rigidity, and hence decreases the optimal level of grease inflation required in the economy.

Keywords: Asymmetry, Wage Rigidity, Segmented Markets, Optimal Inflation

JEL Classification: E24, E32, J42

Suggested Citation

Murali, Srinivasan and Naresh, Abhishek and Shin, Jong Kook and Subramanian, Chetan, Asymmetric Business Cycles in Segmented Labour Markets (December 17, 2020). IIM Bangalore Research Paper No. 632, Available at SSRN: https://ssrn.com/abstract=3750599 or http://dx.doi.org/10.2139/ssrn.3750599

Srinivasan Murali (Contact Author)

Indian Institute of Management (IIMB), Bangalore - Department of Economics and Social Sciences

Bannerghatta Road
Bangalore, Karnataka 560 076
India

Abhishek Naresh

IIM Bangalore ( email )

Jong Kook Shin

Korea University - Sejong Campus ( email )

Sejong
Korea, Republic of (South Korea)

Chetan Subramanian

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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