In their newly published article forthcoming in European Economic Review (A*), Jay Horvath and Guanyi Yang (Colorado College) document that despite the typically more pronounced macroeconomic fluctuations in emerging economies, the unemployment rate is surprisingly less volatile and less countercyclical than in advanced economies.
To rationalize this finding, the authors link, both empirically and theoretically, the distinct unemployment rate behavior in emerging economies to the larger informal sector (value-adding economic activities that go unregistered by the government). The authors show that the informal sector serves as an additional source of labor market flows when the economy is hit by exogenous shocks, and hence weakens the importance of the unemployment margin for labor reallocation.
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Citation: Horvath, J., & Yang, G. (2022). Unemployment dynamics and informality in small open economies. European Economic Review, 141 (1), 103949.
