Heterogeneities and volatility in emerging countries: financial markets, convergence, and labor markets

Abstract

There is evidence of diverse inefficiencies affecting labor markets of developing countries today. In a context of skill-biased technological change and mismatch between skill requirements and endowments of human capital, distortions could lead to structural unemployment, low labor productivity, and informal labor. The foregoing is especially relevant for Latin American economies, where adjustment after crisis events of 1990s and early 2000 has been delayed. Combining theories of search and matching in labor markets with a business cycle approach, we develop a model in the spirit of Mortesen and Pissarides (1999). Including heterogeneous skills among workers and firms, we find that the interaction of trade frictions and mismatching can explain until 77 percent of the excess of turnover of labor markets observed in Chile and Peru, with respect to the US. In addition, they account for 80 to 50 percent of the unemployment gaps