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Cyclical Wage Movements in Emerging Markets Compared to Developed Economies: the Role of Interest Rates

Nan Li ()

Review of Economic Dynamics, 2011, vol. 14, issue 4, 686-704

Abstract: This paper documents that, at the aggregate level, (i) real wages are positively correlated with output and, on average, lag output by about one quarter in emerging markets, while there are no systematic patterns in developed economies, and (ii) real wage volatility (relative to output volatility) is about twice as high in emerging markets compared with developed economies. We then present a small open economy model with productivity shocks and countercyclical interest rates. The model incorporates a working capital requirement and the Jaimovich and Rebelo (2009) preference that allows for flexible parameterization of the strength of income effects on labor supply. The model can account for the high volatility of wage and consumption relative to output and countercyclical trade balances that characterize emerging market economies. During economic downturns, rising interest rates in emerging markets induce relatively large income effects on labor supply, so households would not reduce their labor input as much even though wages drop significantly. (Copyright: Elsevier)

Keywords: Cyclical wage; Interest rates; Emerging market economies; Business cycles (search for similar items in EconPapers)
JEL-codes: E24 E44 F41 F43 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1016/j.red.2011.02.002

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