Academic journal article The Lahore Journal of Economics

Are Some Groups More Vulnerable to Business Cycle Shocks Than Others? A Regional Analysis of Pakistan's Labor Market

Academic journal article The Lahore Journal of Economics

Are Some Groups More Vulnerable to Business Cycle Shocks Than Others? A Regional Analysis of Pakistan's Labor Market

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Since Mitchell's (1927) pioneering study of business cycles, followed by Keynes' General Theory (1936), the literature has assumed that key economic variables exhibit asymmetric behavior over the course of the business cycle, with a dynamic relationship between business cycle fluctuations and unemployment. In a recent study, Belaire-Franch and Peiró (2015) examine the relationship between unemployment and business cycles in the UK and US. They find an unconditional asymmetry in both countries employment rate. In the US, cyclical contractions have a far stronger effect on unemployment than expansions. However, in the UK, male unemployment is more sensitive to cyclical changes than female employment. Several other studies have investigated the asymmetry and nonlinearity of the relationship between unemployment and cyclical movements from the perspective of Okun's law: see, for example, Huang and Chang (2005), Silvapulle, Moosa and Silvapulle (2004), Virén (2001) and Cuaresma (2003).

In the field of labor economics, it is well established that aggregate supply is only slightly pro-cyclical (Mincer, 1966; Pencavel, 1986; Killingsworth & Heckman, 1986; Heckman, 1993). Consequently, macroeconomists have focused on unemployment as a business cycle indicator while abstracting from labor force participation. The literature on monetary policy and simple rules assume that the unemployment gap and output gap are roughly equal (Erceg & Levin, 2014). Blagrave and Santoro (2017) find that age plays an important role in determining participation decisions, especially among men. They explain how the labor participation decision is based on age cohort and business cycle effects. Using a cohort-based analysis, their projected participation rates suggest that population aging may put downward pressure on labor supply and, therefore, on potential output. The study recommends policy measures to increase female labor force participation to compensate for the downward demographic pressure.

This study takes into account previous findings and labor market developments over recession and boom periods in Pakistan. Figures 1 and 2 illustrate labor force participation trends by gender as well as the role of age in determining labor force participation. Movements in female labor force participation are more sensitive to age than male labor force participation.

Many studies argue that cyclical movements in the hourly earnings ratio are due to changes in the characteristics of workers in each group or to changes in pure wage discrimination over the cycle (Figure 3). Biddle and Hamermesh (2013) relate the composition effect to the greater vulnerability of women and minorities to cycle-related job loss. They find that women are more likely to be employed in relatively stable, albeit lower-paid industries and that their relative earnings are hurt by negative shocks.

Glewwe and Hall (1998) identify which socioeconomic groups are most vulnerable to macroeconomic shocks, based on panel data from Peru. Their findings suggest that households headed by women and those with better-educated heads are less vulnerable, while households with more children are more vulnerable. Their study finds that government transfer networks are unable to protect the poor during major macroeconomic shocks.

Broadly, there are two types of vulnerability: (i) policy-induced (in response to changes in government policies) and (ii) market-induced (in response to a macroeconomic shocks). That certain groups are unable to adapt to business cycle shocks reflects market forces interact with household characteristics and earning ability in a rapidly changing environment. For example, older individuals have less incentive to learn new skills and, therefore, their income may decline by more than average after a business cycle shock.

We focus on market-induced vulnerability, as measured by changes in the earnings of individuals over the business cycle. …

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