Effect of terms of trade on the Latin American Labor market

This paper analyzes the effects of terms of trade shocks on the labor market of Latin American countries. We apply the local projections in panel data to estimate the dynamic response of labor variables of 17 sample countries in the period 1980–2019. Our results show that labor indicators respond positively on average in the short term. The labor market, however, deteriorates in the medium term as a consequence of the terms of trade shocks. We also find that the informal rate decreases only in the first year as the ratio to exports–imports prices increases. We identify that the economies with flexible exchange rates, flexible labor rules, and other characteristics mitigate this negative effect of terms of trade in the medium term.