Unemployment dynamics and informality in small open economies

Jaroslav Horvath and Guanyi Yang

European Economic Review, 2022, vol. 141, issue C

Abstract: Despite the typically more pronounced aggregate fluctuations in emerging market economies (EMEs), this paper documents that EMEs exhibit lower relative volatility and countercyclicality of the unemployment rate than small open advanced economies. We link these differences to the larger informal economy in EMEs. We build a small open economy model that combines a formal sector featuring labor search frictions with a frictionless informal sector. A larger informal sector amplifies the impact of productivity and interest rate shocks on formal output, consumption, and employment, while dampening their impact on unemployment. Varying the degree of informality explains a significant fraction of differences in unemployment dynamics across small open economies.

Keywords: Informal economy; Labor market frictions; Emerging markets; Business cycles (search for similar items in EconPapers)
JEL-codes: E26 F44 J64 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:141:y:2022:i:c:s0014292121002427

DOI: 10.1016/j.euroecorev.2021.103949

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