An assessment of the dynamics between the permanent and transitory components of Mexico’s output and unemployment

Abstract

Previous studies about the relationship between the cyclical components of Mexico's output and unemployment suggest that it closely resembles that found in the economy of the United States of America. This would indicate that the dynamics between output and labour markets in the two economies are rather similar. However, these estimates are puzzling for they do not correspond to a characterization made to Mexico's labour market. Using a methodology first proposed by Clark (1989), we find that the correlation between the transitory components of output and unemployment is much lower than previously thought.

Can the informal sector affect the relationship between unemployment and output? An analysis of the Mexican case

“…Chavarín (2001), for example, estimated that the coefficient was close to Okun's original calculations for the United States economy. 13 González Anaya (2002) and Islas and Cortez (2013), 14 however, find much smaller coefficients. These smaller coefficients are puzzling, since the increasing flexibility of Mexico's labour market since the mid-1990s would suggest that the effect of output growth on unemployment should have been much larger.…”

“…Chavarín (2001) estimated that a 1 percentage point change in unemployment would induce a change of around 2.7 percentage points in output. Conversely, a 1 percentage point change in output was associated with a change of 0.3 percentage points in unemployment in the opposite direction.14 Islas and Cortez (2013) estimate that a 1 percentage point change in output is associated with a -0.5 percentage point change in unemployment, while a 1 percentage point change in unemployment is associated with a -1.66 percentage point change in output.15 Gong, Van Soest and Villagomez (2000) found evidence that the probability of transition from both formal and informal employment to unemployment was greater during recessions than in periods of expansion.…”

“…Or the impact of output growth on unemployment changes.3 For a brief overview of some of these studies, seeSilvapulle, Moosa and Silvapulle (2004) andIslas and Cortez (2013), among others.4 The others are the mean unemployment rate, per capita GDP, the GDP share of the service sector and skill mismatches(Ball and others, 2016). 5 See [online] http://www.ilo.org/global/topics/employment-promotion/informal-economy/lang--en/index.htm.…”

Okun’s law in Mexico: an analysis of heterogeneity among States, 2004–2018

“…However, almost 60 years after the publication of that foundational article, there is no global consensus on the optimal rate of sensitivity of unemployment to output for a developed or emerging economy (Islas and Cortez, 2013), especially considering the economic, social and institutional differences behind the structural heterogeneity among regions. Ball and others (2016) find that unemployment is more sensitive to economic activity -or reflects a higher Okun coefficient-when per capita GDP and the share of the tertiary sector in the economy are higher.…”

“…Thus, accepting the structural heterogeneity hypothesis, it is plausible that the Okun coefficient will vary based on the region of a country being examined; in other words, unemployment will respond differently to changes in output. The asymmetries in the Okun coefficients of the various regions reflect structural aspects of development and growth that characterize their labour markets, such as flexibility, segmentation (Dell'Anno and Solomon, 2008;Islas and Cortez, 2018), institutional frameworks (ECLAC, 2012) and productivity (Friedman and Wachter, 1974). This has given rise -in several countries and in recent years-to works that estimate Okun's law at the international and subnational levels.…”