Employment Protection and Business Cycles in Emerging Economies

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Provided by: International Monetary Fund
Topic: Big Data
Format: PDF
The authors 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 they find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent.
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