Disaggregated impacts of macroeconomic shocks on the labor market in Brazil: an analysis using a FAVAR identified via heteroskedasticity

Purpose This study examines the impact of macroeconomic shocks on the formal labor market in Brazil, segmented by workers’ education levels. Design/methodology/approach We estimate a factor-augmented vector autoregression (FAVAR) model identified via heteroskedasticity based on the two-step method of Bernanke et al. (2005), along with the identification approach proposed by Brunnermeier et al. (2021). Findings Various types of macroeconomic shocks, such as those related to monetary policy and expectations, are identified. Our empirical results support the theory of heterogeneous agents for the Brazilian formal labor market over the business cycle, showing that the impacts of these shocks on more educated workers were smaller than other groups. Additionally, the findings suggest that the primary adjustment mechanism of firms is through hiring rather than separations and reveal a pro-cyclical pattern in turnover. Originality/value Unlike previous studies, this paper applies a FAVAR model identified via heteroskedasticity to analyze the effects of macroeconomic shocks on the formal labor market in Brazil, offering additional evidence on how these effects vary across workers with different education levels.