Working Paper: CEPR ID: DP8906
Authors: Eddy Bekkers; Joseph Francois
Abstract: We study the labor market effects of bilateral exchange rate realignment. We place emphasis on the composition of trade, the role of in- termediates, and the underlying conditions of the labor market. Employment effects hinge on the fraction exported to and imported from the trading partner. A larger fraction exported to and a smaller fraction imported from the trading partner make it more likely that appreciation has beneficial effects. Furthermore, more sticky price expectations in wage formation, a smaller fraction of intermediates in the production process, and a lower rate of importer pass through make it more likely that appreciation of the exchange rate of the trade partner has positive employment effects. At a more technical level, the scope for substitution away from higher priced inputs, either toward other sources of supply, or toward value added, is also important to the direction and magnitude of changes in employment.
Keywords: bilateral exchange rates; devaluation; exchange rates and trade; trade and employment
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate appreciation (F31) | employment changes (J63) |
| higher export share relative to imports (F10) | positive employment effects (J68) |
| larger import share (F10) | negative employment effects (J65) |
| wage rigidity (J31) | negative employment changes (J63) |
| ability to substitute away from higher-priced inputs (D24) | direction and magnitude of employment changes (J63) |
| high elasticity of substitution (D11) | employment expansion in response to currency appreciation (F31) |