Essays on Labour Market Fluctuations in Emerging Market Economies

The goal of this dissertation is to contribute to the literature on labour market properties of business cycle fluctuations for emerging market economies (EMEs) by using DSGE modelling and time series analysis. It consists of three essays and the following related topics are analysed.

In the first paper, entitled "Labour Market Fluctuations: An RBC Model for Emerging Market Economies", we examine the labour market properties of business cycle fluctuations for a group of 15 EMEs and the US using annual data from 1970 to 2013. We find that on average, hours worked and employment volatility (relative to output volatility) are lower, while the volatility of productivity and wages are 2-3 times higher in EMEs than in the US. We then assess the performance of a standard RBC model with temporary and permanent productivity shocks to explain those facts observed in the data. We find that this model can account reasonably well for the relative volatility of hours to output; however, it fails to capture for the rest of the relevant moments for EMEs. In order to further improve the fit, we augment this model with capacity utilization, investment adjustment cost and indivisible labour. We find that each of these extensions improves the capability of the RBC model. Especially the model with investment adjustment cost improves its performance regarding the relative volatility of wages and hours, as well as the cyclicality of hours, compared to the standard RBC model. Lastly, we investigate the cyclical properties of the labour wedge (the wedge between the marginal product of labour and the marginal rate of substitution of consumption for leisure) and find that the total labour wedge (relative to output volatility) is more volatile over the business cycle in emerging economies (1.72) compared to the US (0.95). Further, fluctuations in the total labour wedge reflect the ones in the household component rather than the firm component of the wedge in EMEs and the US.

In the second paper, entitled "Technology Shocks, Non-stationary Hours in Emerging Countries and DSVAR", we test a standard DSGE model on impulse responses of hours worked and real GDP after technology and non-technology shocks in EMEs. Most dynamic macroeconomic models assume that hours worked are stationary. However, in the data, we observe apparent changes in hours worked from 1970 to 2013 in these economies. Motivated by this fact, we first estimate a SVAR model with a specification of hours in difference (DSVAR) and then set up a DSGE model by incorporating permanent labour supply (LS) shocks that can generate a unit root in hours worked, while preserving the property of a balanced growth path. These LS shocks could be associated with very dramatic changes in labour supply that look permanent in these economies. Hence, the identification restriction in our models comes from the fact that both technology and LS shocks have a permanent effect on GDP yet only the latter shocks have a long-run impact on hours worked. For inference purposes, we compare empirical impulse responses based on the EMEs data to impulse responses from DSVARs run on the simulated data from the model. The results show that a DSGE model with permanent LS shocks that can generate a unit root in hours worked is required to properly evaluate the DSVAR in EMEs as this model is able to replicate indirectly impulse responses obtained from a DSVAR on the actual data.

In the last paper, entitled "Informal Employment and Business Cycles in Emerging Market Economies", we examine the relationship between informal employment and business cycles in EMEs and investigate how informal employment is relevant in shaping the aggregate dynamics in these economies. The key features of stylized facts from our data is that it is countercyclical in Mexico, Colombia and Turkey but pro-cyclical in South Africa. In addition, informal employment is negatively correlated with formal employment in Mexico but positively correlated in Colombia, South Africa, and Turkey. To account for these empirical findings, we build a small open economy model with both formal and informal labour markets, and it subjects to stationary and trend shocks to total factor productivity. We also allow labour adjustment costs in the model as strict employment protection which differ among these economies. We then examine the effect of changes in the degree of employment protection on the informal employment and the business cycles in EMEs and the extent to which the informal sector acts as a buffer in the face of adverse shocks to the labour market. The results show that this model can capture some key stylized facts of the labour market in these economies and that the informal sector acts as a propagation mechanism for these shocks. Moreover, informal employment acts as a buffer as it is countercyclical while formal employment is pro-cyclical in the model which supports the results from the data except for South Africa. Regarding volatilities, informal employment does not act as a buffer since formal employment is more volatile than informal employment in the model which contrasts with the evidence in the data for these economies except Colombia.