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LABOR MARKET DYNAMICS UNDER TECHNOLOGY SHOCKS: THE ROLE OF SUBSISTENCE CONSUMPTION

Published online by Cambridge University Press:  11 June 2021

Sangyup Choi  and
Myungkyu Shim
Sangyup Choi*
Affiliation:
Yonsei University
Myungkyu Shim
Affiliation:
Yonsei University
*
Address correspondence to: Sangyup Choi, School of Economics, Yonsei University, Yonsei-ro 50, Seodaemun-gu, Seoul 03722, Republic of Korea. email: sangyupchoi@yonsei.ac.kr. Phone: +82 2 2123 2492.
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Abstract

This paper establishes new stylized facts about labor market dynamics in developing economies, which are distinct from those in advanced economies, and then proposes a simple model to explain them. We first show that the response of hours worked and employment to a technology shock—identified by a structural VAR model with either short-run or long-run restrictions—is substantially smaller in developing economies. We then present compelling empirical evidence that several structural factors related to the relevance of subsistence consumption across countries can jointly account for the relative volatility of employment to output and that of consumption to output. We argue that a standard real business cycle (RBC) model augmented with subsistence consumption can explain the several salient features of business cycle fluctuations in developing economies, especially their distinct labor market dynamics under technology shocks.

Keywords

Business CyclesDeveloping EconomiesSubsistence ConsumptionLabor Market DynamicsIncome EffectVector Autoregressions
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 8 , December 2022 , pp. 1965 - 1993
Copyright
© Cambridge University Press 2021

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Footnotes

We would like to thank two anonymous referees and the co-editor (Lee Ohanian) for their valuable comments. We are also grateful to Yongsung Chang, Chaoran Chen, Woojin Choi, Hyeon-Seung Huh, Jinwook Hur, Yongseung Jung, David Kim, Jinill Kim, Kwang Hwan Kim, David Lagakos, Byungchan Lee, Thomas Lubik, Jung Jae Park, Kwanho Shin, Denis Tkachenko, Donghoon Yoo, Andres Zambrano, and the seminar participants at the Korea Development Institute, Korea Institute for International Economic Policy, Korea University, National University of Singapore, Sogang University, University of Seoul, Yonsei University, the Fall 2018 Midwest Macroeconomic Meetings at Vanderbilt University, the 2018 China Meeting of the Econometric Society, the 1st Yonsei Macro-Finance Mini Conference, and the 13th Joint Economics Symposium of Six Leading East Asian Universities at Fudan University for their helpful comments and suggestions. All remaining errors are ours. Shim acknowledges the financial support from Yonsei University (Yonsei University Humanities and Social Science Research Grant (2020-22-0387)).

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