This paper establishes new stylized facts about labor market dynamics in developing economies, which are distinct from those in advanced economies, and then proposes a simple model to explain them. We first show that the response of hours worked and employment to a technology shock—identified by a structural VAR model with either short-run or long-run restrictions—is substantially smaller in developing economies. We then present compelling empirical evidence that several structural factors related to the relevance of subsistence consumption across countries can jointly account for the relative volatility of employment to output and that of consumption to output. We argue that a standard real business cycle (RBC) model augmented with subsistence consumption can explain the several salient features of business cycle fluctuations in developing economies, especially their distinct labor market dynamics under technology shocks.
Abstract
This article argues that short-time work stabilized employment in Germany substantially during the Great Recession in 2008/09. The labor market instrument acted in timely manner, as it was used in a rule-based fashion. In addition, discretionary extensions were effective due to their interaction with the business cycle. To ensure that short-time work will be effective in the future, this article proposes an automatic facilitation of the access to short-time work in severe recessions. This reduces the likelihood of a too extensive use at the wrong point in time as well as structural instead of cyclical interventions.
LABOR MARKET DYNAMICS UNDER TECHNOLOGY SHOCKS: THE ROLE OF SUBSISTENCE CONSUMPTION