Asymmetric Business Cycles in Segmented Labour Markets

We document the presence of asymmetric business cycles in both regular and contract labour markets in India and investigate the role of nominal wage rigidities and labour adjustment costs in accounting for these asymmetries. Using data from Annual Survey of Industries, we find that (i) the growth rate of output is negatively skewed, (ii) the growth of regular employment is negatively skewed while that of contract employment is positively skewed, (iii) the nominal wage growth of regular workers is positively skewed while that of contract workers is negatively skewed. We show that a standard business cycle model augmented with asymmetric wage adjustment cost for both regular and contract labour coupled with symmetric labour adjustment cost for regular workers does a good job of explaining the asymmetries in both output and employment cycles. We also find that the presence of contract labour relaxes the constraint of downward nominal wage rigidity, and hence decreases the optimal level of grease inflation required in the economy.