Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240660 
Year of Publication: 
2018
Series/Report no.: 
Working Papers No. 2018-19
Publisher: 
Banco de México, Ciudad de México
Abstract: 
We analyze the joint impact of employment protection and informality on macroeconomic volatility and the propagation of shocks in emerging economies. For this, we propose a small open economy business cycle model with frictional labor markets, labor regulation, and an informal sector, modeled as self-employment. The model is calibrated to the Mexican economy, in particular to business cycle moments for employment and informality obtained from our own calculations with the ENOE survey for the period 2005-2016. We show that international interest rate shocks, which affect specifically job creation in the formal sector, are key to obtain a counter-cyclical informality rate. In our model both the economy without an informal sector and the economy with informality but a lower burden of labor regulation feature higher volatility in employment but smaller fluctuations in TFP and output.
Subjects: 
informality
business cycle
small open economy
job creation
employment protection
international interest rate shocks
JEL: 
E24
E32
F44
J65
Document Type: 
Working Paper
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