Jobless recoveries: Labour lost

Posted: October 25, 2012 in economy
Tags: , ,

I’VE been mulling over an interesting new (or newly updated) paper by Guillermo Calvo, Fabrizio Coricelli, and Pablo Ottonello on the labour-market consequences of differing inflation rates in the wake of financial crises. Here’s the gist of it:This paper documents that, for a sample of post-war recession episodes in advanced and emerging market economies (EMs), financial crises tend to be followed by jobless recoveries in the presence of low inflation and by “wageless” recoveries in the presence of high inflation…In advanced economies, where inflation in the post-war era has been relatively low, financial crises have been followed by jobless recoveries of intensity significantly stronger than “normal” recessions…In EMs, heterogeneity in inflation allows us to divide the sample in “high” and “low” inflation episodes. We find again a sluggish adjustment of labor markets during the recovery from financial crises, but the nature of such adjustment depends on inflation. “High inflation” recession episodes are not associated jobless recoveries but wageless recoveries. This is consistent, empirically, with the findings in Calvo et al (2006), in which EMs that suffer a systemic sudden stop experience wageless recoveries, and, theoretically, with the model by Schmitt-Grohé and Uribe (2011), whereby in the presence of nominal wage rigidities, economies that generate inflation …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2012/10/jobless-recoveries?fsrc=rss

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