Evaluating Labor Market Flexibility in Chile from an International Perspective

Abstract

We rank Chile in terms of labor market flexibility among a group that includes both OECD and emerging economies. We use a performance-based indicator of labor-market flexibility based on the half life of unemployment responses to macroeconomic shocks. This indicator captures the cyclical behavior of the labor market and is obtained by estimating a structural VAR (SVAR). The SVAR is identified using long-run restrictions, which are based on a simple open-economy model with labor-market rigidity. We found that Korea, Hong Kong, Chile, US, and Mexico are the most flexible economies. At the other end, our index indicates that Germany, Sweden, Spain and Colombia are the most rigid labor markets.