The Ins and Outs of Unemployment in a Dual Labor Market

Transcription

1 The Ins and Outs of Unemployment in a Dual Labor Market Eduardo Zylberstajn (Fipe and Sao Paulo School of Economics - FGV) André Portela Souza (Sao Paulo School of Economics - FGV) IZA/ILO 2016

2 Motivation What explains fluctuations in the unemployment rate? o Ins into and out of unemployment: which wins? Reach literature (Shimer, 2007/2012 and Petrongolo and Pissarides, 2008) Little evidence in developing countries How to use this framework in dual labor markets

3 Figure 1a - Unemployment rate in Brazil 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Note: Unemployment rate is calculated based on PME (IBGE) data for individuals aged 15 years of age or more.

4 Figure 1b Formal Employment in Brazil 69% 67% 65% 63% 61% 59% 57% 55%

5 Traditional approach Shimer (2012) and Petrongolo e Pissarides (2008) Express the unemployment rate as a ratio of transition probabilities between Employment (E) and Unemployment (U) and Inactivity (I): u t = s t e t f t u t = s t (1 u t ) f t u t s t u t = s t + f t u t = λ EU t + λ t EU + λ t IU λ t IU + λ t IE λ t EI λ t IU λ t IU + λ t IE λ t EI + λ t UE + λ t IE λ t IU + λ t IE λ t UI

6 Labor Market transitions in Brazil Data: PME ( ); all series are hp-filtered 18% 2% 16% 14% Unemployment - Inactivity Employment - Inactivity 12% 10% 8% 6% Unemployment - Employment 1% Employment - Unemployment 4% 0% 4% 3% Inactivity - Employment 2% 1% Inactivity - Unemployment 0%

7 Evolution of the Unemployment rate u t = λ t EU + λ EU t + λiu t λ IU IE t + λ λei t t λiu t λ IU IE t + λ λei t + λ UE IE λ t + t t λ IU IE t + λ λui t t 14.0% 12.0% Steady state (3 states) Actual 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% ρ=0.96

8 Results: 3 states model Contributions from each transition: β AB = cov(u t AB, u t ) var(u t ) Transition E U 0,472-0,057 E I 0,057 0,008 U I 0,071 0,120 U E 0,147 0,815 I U 0,269 0,208 I E -0,041 0,164 Employment Unemployment 12% 11% 10% 9% 8% 7% Hypothetical 6% 5% 4% 3% Steady state Inactivity Unemployment 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% Hypothetical Steady state Unemployment - Employment 12% 11% 10% 9% 8% 7% 6% Hypothetical 5% 4% Steady state 3%

9 Brazil: dual labor market Brazilian labor market has a large informal sector However, informality fell sharply in the past decade whereas total employment experienced significant growth i.e. formal and informal employment must have had different dynamics How has these different trends impacted unemployment? Does accounting for these differences change the results?

10 Brazil: dual labor market We extend Shimer s model by adding one extra state: E = E0 + E1 The dynamics of each state can be described by: U t = λ t 0U E t 0 + λ t 1U E t 1 + λ t IU I t (λ t U0 + λ t U1 + λ t UI )U t E t 0 = λ t U0 U t + λ t I0 I t + λ t 10 E t 1 (λ t 0U + λ t 0I + λ t 01 )E t 0 E t 1 = λ t U1 U t + λ t I1 I t + λ t 01 E t 0 (λ t 1U + λ t 1I + λ t 10 )E t 1 In steady state, It = λ t UI U + λ t 0I E t 0 + λ t 1I E t 1 (λ t IU + λ t I0 + λ t I1 )I t

11 Brazil: dual labor market Manipulate these equations to get: Or simply: Which yields the 4-state unemployment rate dynamics: u = s 0 fs 1 fs 1 fs 0 fs 0 s 0 fs 1 fs 1 fs 0 fs 0 + s 1 + s 1 + f 1 + fs 1 fs 1 fs 0 fs 0

12 Transitions in Brasil: accounting for informality

13 Evolution of the Unemployment rate (2) 3 states: 4 states: u t = λ EU t + λ t EU + λ t IU λ t IU + λ t IE λ t EI λ t IU λ t IU + λ t IE λ t EI + λ t UE + λ t IE λ t IU + λ t IE λ t UI u = s 0 fs 1 fs 1 fs 0 fs 0 s 0 fs 1 fs 1 fs 0 fs 0 + s 1 + s 1 + f 1 + fs 1 fs 1 fs 0 fs % 12.0% Steady state (4 states) Steady state (3 states) Actual 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

14 Results: 4-state model Transitions Informal U 0,205 0,047 Informal I 0,029 0,032 Informal Formal 0,011 0,004 Formal U 0,201-0,103 Formal I -0,025-0,031 Formal Informal 0,154-0,007 U I 0,031 0,053 U Formal 0,274 0,565 U Informal -0,197 0,164 I U 0,299 0,265 I Formal 0,066 0,125 I Informal -0,079 0,034 Unemployment - Formal Formal Unemployment Inactivity Unemployment

15 Final remarks The decline in the unemployment rate in Brazil ( ) is associated to: Increase in formal finding rate Decrease in the entry rate from inactivity Increase in employment hoarding Decrease in formal separation rates The increase in the unemployment rate in Brazil ( ) is associated to: Decrease in formal finding rate (both from U and I) Increase in the entry rate from inactivity No increase in separation rates yet Accounting for the duality of the LM is crucial for a complete understanding of different dynamics

16 Final remarks Conjectures The movemnts of unemployment and formality are observed across all worker s types, firms, sectors, regions, etc. Macroeconomic policies are potential candidates to explain these overall changes. Interest rates, credit expansion, regulation costs of formal firms, etc. Decrease in the transition from inactivity to labor market is partly due to young individuals postponing entry in the labor market and staying longer in school. Potential roles of the educational policies.