Labor Market Dynamics under Technology Shocks : the Role of Subsistence Consumption

Although much is known about labor market dynamics under technology shocks in advanced economies, this is not true for developing economies. This study bridges this gap in the literature by establishing new stylized facts in labor market dynamics. First, the response of hours worked (and employment) to a permanent technology shock-identified by a structural VAR model with long-run restrictions-is smaller in developing economies than in advanced economies. Second, the level of PPP-adjusted income per capita-a proxy for the importance of subsistence consumption-is strongly and robustly associated with the relative variability of employment and consumption to output across countries. We build a simple RBC model augmented with subsistence consumption and show that this minimal departure allows us to account for the salient features of business cycle fluctuations in developing economies, including their distinct labor market dynamics