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Demand Shocks and Labor Market Dynamics: Firm Level Responses to a Commodity Boom

Sergio Urzua, Felipe Saffie () and Felipe Benguria

No 1443, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the role of labor markets in the transmission of commodity price super cycles, including the causal association between dynamic labor distortions and recessions during cycle busts. Our theoretical contributions emerge from a three-sector model of a small open economy with firm heterogeneity, entry and exit decisions, and skilled and unskilled labor. We show that during the boom, the commodity and non-tradable sectors expand, the skill wage premium narrows, and the non-commodity export sector contracts. During the bust, on the other hand, downward wage rigidity generates dynamic misallocation between sectors, triggering a persistent recession characterized by unemployment and a sluggish recovery of non-commodity exporters. This opens a door for precautionary policy during the boom. We then present empirical evidence to asses these mechanisms. In particular, we study the case of Brazil between 1996-2013, a period in which large commodity price fluctuations provided a clean quasi-natural experiment. We examine linked employer-employee data and exploit variation across commodities and across regions to measure the direct impact of commodity prices on labor market outcomes of both commodity producing firms and firms in other sectors of the economy. Our empirical evidence support our theoretical implications.

Date: 2017
New Economics Papers: this item is included in nep-bec, nep-dge and nep-lam
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