European Parliament Library

Employment Protection and Business Cycles in Emerging Economies, Ruy Lama, Carlos Urrutia

We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment
Table Of Contents
Cover; Contents; 1. Introduction; Tables; Table 1 Business Cycle Properties and Employment Protection Across Countries; 2. A Small Open Economy with Labor Market Frictions; 2.1 The Constrained Efficient Allocation; Figures; Figure 1 Optimal Separation Rule and Endogenous Productivity Threshold; 2.2 Selection and the Cleansing Effect of Recessions; Table 2 Transition between Occupational Status and Selection Effect in Mexico; Figure 2 Optimal Separation Rule with High and Low Firing Costs; 3. The Baseline Economy; 3.1 Solution Method and Calibration; Table 3 Parameters for the Baseline Economy
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (41 p.)
Specific Material Designation
Form Of Item

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