IDEAS home Printed from https://ideas.repec.org/p/red/sed017/1443.html
   My bibliography  Save this paper

Demand Shocks and Labor Market Dynamics: Firm Level Responses to a Commodity Boom

Author

Listed:
  • Sergio Urzua

    (University of Maryland, College Park)

  • Felipe Saffie

    (University of Maryland)

  • Felipe Benguria

    (University of Kentucky)

Abstract

This paper studies the role of labor markets in the transmission of commodity price super cycles, including the causal association between dynamic labor distortions and recessions during cycle busts. Our theoretical contributions emerge from a three-sector model of a small open economy with firm heterogeneity, entry and exit decisions, and skilled and unskilled labor. We show that during the boom, the commodity and non-tradable sectors expand, the skill wage premium narrows, and the non-commodity export sector contracts. During the bust, on the other hand, downward wage rigidity generates dynamic misallocation between sectors, triggering a persistent recession characterized by unemployment and a sluggish recovery of non-commodity exporters. This opens a door for precautionary policy during the boom. We then present empirical evidence to asses these mechanisms. In particular, we study the case of Brazil between 1996-2013, a period in which large commodity price fluctuations provided a clean quasi-natural experiment. We examine linked employer-employee data and exploit variation across commodities and across regions to measure the direct impact of commodity prices on labor market outcomes of both commodity producing firms and firms in other sectors of the economy. Our empirical evidence support our theoretical implications.

Suggested Citation

  • Sergio Urzua & Felipe Saffie & Felipe Benguria, 2017. "Demand Shocks and Labor Market Dynamics: Firm Level Responses to a Commodity Boom," 2017 Meeting Papers 1443, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1443
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2017/paper_1443.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Vincent Reinhart & Christoph Trebesch, 2016. "Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015," American Economic Review, American Economic Association, vol. 106(5), pages 574-580, May.
    2. Costa, Francisco & Garred, Jason & Pessoa, João Paulo, 2016. "Winners and losers from a commodities-for-manufactures trade boom," Journal of International Economics, Elsevier, vol. 102(C), pages 50-69.
    3. Fernández, Andrés & Schmitt-Grohé, Stephanie & Uribe, Martín, 2017. "World shocks, world prices, and business cycles: An empirical investigation," Journal of International Economics, Elsevier, vol. 108(S1), pages 2-14.
    4. Dix Carneiro,Rafael & Kovak,Brian K., 2015. "Trade reform and regional dynamics : evidence from 25 years of Brazilian matched employer-employee data," Policy Research Working Paper Series 7205, The World Bank.
    5. Uribe, Martín & Schmitt-Grohé, Stephanie, 2015. "How Important Are Terms Of Trade Shocks?," CEPR Discussion Papers 10655, C.E.P.R. Discussion Papers.
    6. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    7. Stephanie Schmitt-Grohé & Martín Uribe, 2016. "Downward Nominal Wage Rigidity, Currency Pegs, and Involuntary Unemployment," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1466-1514.
    8. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    9. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Felipe Benguria & Felipe Saffie & Sergio Urzua, 2024. "The Transmission of Commodity Price Super-Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(4), pages 1923-1955.
    2. Alexandre Janiak & Paulo Santos Monteiro, 2011. "Inflation and Welfare in Long‐Run Equilibrium with Firm Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(5), pages 795-834, August.
    3. Cristina Fernández & Roberta García & Paloma Lopez-Garcia & Benedicta Marzinotto & Roberta Serafini & Juuso Vanhala & Ladislav Wintr, 2017. "Firm growth in Europe: An overview based on the COMPNET labour module," BCL working papers 107, Central Bank of Luxembourg.
    4. HAMANO Masashige & OKUBO Toshihiro, 2021. "In Search of Lost Time: Firm Vintage and Macroeconomic Dynamics," Discussion papers 21015, Research Institute of Economy, Trade and Industry (RIETI).
    5. Jiang, Zheng & Shi, Huimin, 2016. "The selection of firms based on productivity: different roles of entry and overhead cost," Economic Modelling, Elsevier, vol. 54(C), pages 537-544.
    6. Bento, Pedro & Restuccia, Diego, 2021. "On average establishment size across sectors and countries," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 220-242.
    7. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    8. David H. Autor & David Dorn & Gordon H. Hanson, 2016. "The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 205-240, October.
    9. Riadh Ben Jelili, "undated". "Firm Heterogeneity and Productivity: The Contribution of Microdata," API-Working Paper Series 1013, Arab Planning Institute - Kuwait, Information Center.
    10. Kamihigashi, Takashi & Stachurski, John, 2015. "Perfect simulation for models of industry dynamics," Journal of Mathematical Economics, Elsevier, vol. 56(C), pages 9-14.
    11. A. Kerem Co?ar & Nezih Guner & James Tybout, 2016. "Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy," American Economic Review, American Economic Association, vol. 106(3), pages 625-663, March.
    12. Thomas J. Holmes & John J. Stevens, 2010. "An alternative theory of the plant size distribution with an application to trade," Finance and Economics Discussion Series 2010-30, Board of Governors of the Federal Reserve System (U.S.).
    13. Tetsushi Murao, 2017. "Aggregate Productivity Growth Decomposition: an Overview," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 13(3), pages 269-286, November.
    14. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    15. Takashi Kamihigashi & John Stachurski, 2013. "Exact Sampling from the Stationary Distribution of Entry-Exit Models," Discussion Paper Series DP2013-03, Research Institute for Economics & Business Administration, Kobe University.
    16. Poschke, Markus, 2009. "Employment protection, firm selection, and growth," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1074-1085, November.
    17. Vincent Sterk & Petr Sedláček & Benjamin Pugsley, 2021. "The Nature of Firm Growth," American Economic Review, American Economic Association, vol. 111(2), pages 547-579, February.
    18. Hugo A. Hopenhayn, 2013. "On the Measure of Distortions," 2013 Meeting Papers 189, Society for Economic Dynamics.
    19. Lee, Yoonsoo & Mukoyama, Toshihiko, 2018. "A model of entry, exit, and plant-level dynamics over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 96(C), pages 1-25.
    20. Sedlacek, Petr & Sterk, Vincent, 2019. "Reviving american entrepreneurship? tax reform and business dynamism," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 94-108.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:1443. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.