Intensity of labor shocks behind the changes in Brazilian hours worked during the pandemic

Abstract

COVID-19 has impacted the labor market in multiple ways, including by reducing the number of hours effectively worked. A study on the US economy found that two-thirds of the drop in the aggregate growth rate of hours worked was due to a labor supply shock. This paper quantifies the role of labor supply and labor demand shocks in Brazil’s labor market behavior during the COVID-19 period by estimating a Bayesian Structural Vector Autoregression (BVAR) with sign restrictions on the slopes of the labor supply and labor demand curves. Our results show that labor demand shocks were more important than labor supply shocks in explaining the decline in hours effectively worked. The prominence of labor demand shocks in Brazil is an exciting result that demonstrates the heterogeneous impacts of similar shocks on high- and middle-income economies.