Financial crises and labor market turbulence

Financial crises in emerging markets trigger a significant reallocation of labor as exchange rate depreciations and interest rate increases cause relative prices to change drastically. Household survey data for Mexico reveal that individuals who switched industry or occupation during the 1994–1995 crisis lost about 10% of their hourly earnings on average compared to similar workers who did not move. This suggests that many workers became less productive in the process of migrating to different economic activities. These productivity losses, in turn, can explain about 40% of the observed fall in TFP in Mexico in 1995.