Economic Shocks and Labour Market Flexibility

March 9 2015

The paper explores how labor markets adjust to large but temporary economic shocks in a context where those shocks are common. We leverage geo-referenced data on the path of typhoons in the Philippines to estimate the impacts of typhoons occurrence on employment and wage income. Using a balanced panel of about 1,100 municipalities over 26 quarters, we find short-run negative effects of the shocks on average weekly income but no effects on employment levels. We then take advantage of a large repeated cross-section of working age individuals and an individual-level panel to establish clear evidence of downward flexibility of both hours worked and hourly wages. We can rule out that results are driven by either changes in labour supply, sample composition or by individuals switching to low-paying jobs. These results hold in formal, wage-paying employing jobs, suggesting significant downward flexibility built into long-term employment agreements that insure workers from layoffs during times of economic shock.

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Simon Franklin is a Postdoctoral Research Economist at LSE. His research focuses on Development, Labour, and Urban Economics.