Is Employment Adjustment in Chile Sluggish?

We study how aggregate employment adjusted in the Chilean economy to the so called
Asian Crisis.

We test different hypotheses used in the public debate, although not formally tested, that try to explain the sluggish adjustment. For this purpose we estimate a vector autoregressive model and test different hypotheses on structural breaks in the labor demand function after the Asian Crisis. The results indicate that the income elasticity of demand is unstable after the crisis, although not in the sense suggested by the previous debate. Additionally, the results suggest that the more decisive factor in the slow recovery were the prevailing labor costs of adjustment in the Chilean economy.