Financial Crises and Labor Market Turbulence

Financial crises cause significant reallocation of labor across sectors and occupations. This results in transitory losses in the quality of labor as specific human capital is destroyed and workers devote time to learning new skills, among other possible transition costs. In other words, crises are periods of high turbulence in the sense of Ljunqvist and Sargent (1998). In this paper, we provide strong evidence that these losses were substantial in the case of Mexico's 1994-95 crisis. Workers that changed occupations or sectors during the crisis lost more than 10% in wages, compared to those who did not. We show that these losses in productivity can account for a significant part of the drop in conventionally-measured TFP that took place during the crisis.