Macroeconomic Dynamics In A Model Of Goods Labor And Credit Market Frictions PDF Download

The labor market is undoubtedly the closest and most intimate aspect of the economy that the individuals face. The type of employment has also evolved over time alongside the labor market. While much study has been focused on the labor market, not enough light has been shed on self-employment, which is unique in that it is a form of employment at the borderline of workers and firms. Relating the motivation for starting one's own business to the possibility of finding wage-paying jobs is even rarer, as much of previous literature see self-employment from the perspective of credit constraints or avoiding costly labor and tax regulations. As the share of self-employment is non-negligible (which is especially true in developing, small open economies), a proper understanding of self-employment is crucial in successfully carrying out structural reforms as well. With this agenda in mind, this dissertation seeks to understand two main issues. First is exploring how individuals' decisions towards choosing into self-employment can be tied to the state of the labor market (i.e. the probability of finding wage-paying work). This additional source of employment eventually affects the composition of the labor market and thus the business cycle dynamics. The second topic of the dissertation is studying the consequences of such self-employment on the macroeconomic efficiency and the outcomes of structural reforms on the product and labor markets. The first chapter focuses on the consequences of different decisions regarding the international financial market integration and exchange rate policy in a small open economy, Korea. The chapter is targeted towards a deeper understanding of a combination of policies under two important ingredients in a Dynamic Stochastic General Equilibrium (DSGE) model: producer entry into domestic and export markets and labor market frictions. Results show that under flexible exchange rates, access to international financial markets increases the volatility of both business creation and the number of exporting plants, with the effects on employment volatility being more modest. The exchange rate peg can have unfavorable consequences for the effects of terms of trade appreciation, and more financial integration is not necessarily beneficial under a peg. The combination of a floating exchange rate and internationally complete markets would be the best scenario for Korea among those the chapter focuses on. The second chapter introduces workers' endogenous transition in and out of self-employment in the traditional Diamond-Mortensen-Pissarides (DMP) framework, while keeping the crucial ingredients in a closed economy DSGE framework as explored in \autoref{chp:fmkorea}. Under such settings, labor market composition becomes more volatile, leading to greater fluctuations and higher welfare costs from business cycles. A comparison with a centrally planned economy shows that self-employment becomes an additional source of inefficiency in the economy. The lack of job creation by the self-employed implies reforms being less effective when targeted towards them. The third chapter brings together the first two chapters by allowing self-employment in a small open economy, calibrated for Korea. Specifically, the hiring firms produce tradable goods and engage in exporting, while the self-employed produce nontradable goods and only serve the domestic market. The model displays a much higher rate of self-employment (around 36% of employment) compared to the closed economy calibrated for the U.S. in the second chapter. It also shows the real exchange rate appreciating and terms of trade depreciating under financial autarky after a productivity shock, where the size of the fluctuations depends on the firm creation in both tradable and nontradable sectors. Allowing international borrowing leads to more consumption smoothing but relatively less entry in both hiring and self-employed firms, with unemployment becoming less volatile and terms of trade initially appreciating.