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Essays on labour market fluctuations in emerging markets Kabaca, Serdar


The goal of this dissertation is to compare and contrast labour market fluctuations in emerging and developed markets, and to explore the sources of differences in these fluctuations across country groups. Chapter 2 documents cyclical properties of labour share over the cycle for various countries and show that there is a close relationship between labour share and the cost of borrowing. Labour share tends to be more volatile and procyclical with output especially in countries with highly volatile and countercyclical interest rates. The results are driven neither by sectoral shifts over the cycle nor by the measurement errors in the labour compensation data. In Chapter 3, working capital requirements can predict the right sign of the labour share comovement with output and can partly account for the volatility of the labour share. It is also shown that imperfect financial markets in the form of credit restrictions not only amplify the results for the variability of labour share but also helps better explain some of the striking business cycle regularities in emerging markets, such as highly volatile consumption, strongly procyclical investment and consumption, and countercyclical net exports. Fluctuations in real wages are mostly responsible for the highly volatile labour share in emerging markets. Previous literature showed that search frictions with countercyclical interest rates can explain movements in wages in these economies. Chapter 4 shows that when agents are allowed to choose the amount of hours worked (intensive margin of the labour input), the effects of search frictions on wages are mitigated. Our motivation of introducing intensive margin comes from the fact that variations in hours per worker are at least as significant as those in the employment in emerging markets. They are also more cyclical with output in these economies than in developed ones. Search frictions fail to explain these cyclical properties of the intensive margin. On the other hand, by introducing financial frictions, the model can predict them together with movements in real wages. This suggests that frictions in both labour and financial markets go further in explaining emerging market business cycles.

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