Labor market dynamic in Chile: The role of the terms of trade

This paper explores some of the channels through which the terms of trade influence the labor market in an emerging economy like Chile. To do so, we analyze the cyclical properties of labor variables using an autoregressive vector to estimate the responses of the labor market to a terms of trade shock in Chile, for which two sources are defined: the mining industry and other sectors. We also develop a multiple sector model with search frictions that generates fluctuations in the rate of unemployment. Using a version of the model calibrated for Chile, we analyze its capacity to replicate the observed responses of the labor market to terms of trade fluctuations. We find that the model can qualitatively predict the effects of innovations in the terms of trade on the labor variables. However, from a quantitative standpoint, the base model is unable to replicate all the estimated responses of the labor market variables to the terms of trade. Alternative versions of the model are used to examine what elements are required to have quantitative predictions that are similar to the estimations.