The Employment–Output Disconnect in Emerging Markets

Overview & Synopsis

Output cycles are more violent in emerging market economies (EMs) than in advanced economies, yet employment remains largely detached from activity in EMs. This partly reflects composition: self-employment, which is more prevalent in EMs, responds less to output than wage employment. EM labor markets also adjust through different channels: separations from wage employment are acyclical, self-employment entries are countercyclical, and inflows into wage employment draw primarily from inactivity and self-employment rather than unemployment. The result is an asymmetry as employment responds to output similarly across both groups during expansions, and diverges in contractions, when advanced economies reduce employment more sharply.