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Total Factor Productivity and Labor Reallocation: The Case of the Korean 1997 Crisis

David Benjamin () and Felipe Meza

The B.E. Journal of Macroeconomics, 2009, vol. 9, issue 1, 1-41

Abstract: In recent research on financial crises, large exogenous shocks to total factor productivity (TFP) are used as the driving force accounting for large output falls. TFP fell 3% after the Korean 1997 financial crisis. We find evidence that the large fall in TFP is mostly due to a sectoral reallocation of labor from the more productive manufacturing and construction sectors to the less productive wholesale trade sector, the public sector and agriculture. We construct a two-sector model that accounts for the labor reallocation. The model has a consumption sector and an investment sector. Firms face sector-specific working capital constraints, which we calibrate with data from financial statements. The rise in interest rates makes inputs more costly. The model accounts for 42% of the TFP fall. The model also accounts for 53% of the fall in GDP. It is broadly consistent with the post-crisis behavior of the Korean economy.

Date: 2009
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DOI: 10.2202/1935-1690.1625

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