Aggregate Shocks and Labor Market Responses: Evidence from Argentina's Financial Crisis

Cross-sectional and panel labor force survey data are used to study the impact of the 2002 Argentine financial crisis on household and individual incomes and the labor market response. Changes in nominal wages, entry and exit into the workforce, hours worked, household labor supply and work program participation are studied separately, and then a decomposition is provided to determine which factors impacted most on total household income. The main effect of the crisis is found to be a large fall in real wages in all sectors of the economy, with weak labor demand preventing households from increasing labor supply. Participation and labor hours in self-employment are also found to fall, providing evidence against the view that this sector acts as an outlet for surplus labor during crises.