Understanding the Impact of Economic Shocks on Labor Market Outcomes in Developing Countries : An application to Indonesia and Mexico
In this paper the authors use a search and matching model of multi-sector labor markets, to understand the channels through which economic shocks affect labor market outcomes in developing countries. In the model workers can be employed in agricult...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100427134640 http://hdl.handle.net/10986/3770 |
| Summary: | In this paper the authors use a search
and matching model of multi-sector labor markets, to
understand the channels through which economic shocks affect
labor market outcomes in developing countries. In the model
workers can be employed in agriculture, formal or informal
urban jobs, or unemployed. Economic shocks are manifested as
either increased turbulence in the formal/informal sectors
or a decrease in overall sectoral productivity. By
calibrating the model to Indonesia and Mexico, the authors
are able to understand how the 1998 Indonesian crisis and
the 2001 Mexican recession translated into labor market
outcomes. They then venture to simulate how the current
financial crisis might affect the allocation of labor and
earnings across sectors, in these countries. The results
suggest that in both countries past crises have increased
the degree of turbulence of the formal sector, increasing
job destruction. However, while in Indonesia the crisis
affected the overall formal sector productivity, this was
not the case in Mexico. This explains the larger blow to
formal wages -- relative to the size of the shock- witnessed
by Indonesian workers. The response of the informal sector
was also different: In both countries the informal sector
was able to act as a buffer, as relative earnings increased.
However, while in Mexico it became much harder to find
informal sector opportunities and easier to keep the job
once found; in Indonesia turbulence in the informal sector
increased substantially increasing the job destruction rate
of informal jobs and limiting the cushioning role that the
informal sector might have played. The agricultural sector
was spared from the shock in both countries. In Indonesia,
it actually benefited from an unusual exogenous increase in
the price of rise. The simulations show that if either the
informal or agricultural sectors are spared from the shocks,
large reallocations of labor might occur, and the overall
effect of the shock is smaller. Instead, if these sectors
can t buffer the shock, the reallocation of labor is much
smaller, but earnings in the formal sector drop
substantially. The authors also explore the impact of
alternative policies. They find that in relatively flexible
markets where informality can be seen more as a choice
rather than as queuing, unemployment benefits and informal
employment subsidies may have paradoxical effects, by
discouraging formal search. Instead, policies targeted at
creating informal employment and boosting formal TFP growth
have the desired effects. |
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