Abstract
Real exchange rate movements are important drivers of the reallocation of resources between sectors of the economy. Economic theory suggests that the impact of exchange rates should vary with the degree of exposure to international competition and with the technology level. We show that both the degree of openness and the technology level mediate the impact of exchange rate movements on labour market developments. According to our estimations, whereas employment in high-technology sectors seems to be relatively immune to changes in real exchange rates, these appear to have sizable and significant effects on highly open low-technology sectors. The analysis of job flows suggests that the impact of exchange rates on these sectors occurs through employment destruction.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Data from the OECD STAN database available at www.oecd.org/sti/stan/.
Auer and Fischer (2008), in a related paper, conclude that trade with low-income countries has had a significant impact on U.S. industry productivity and prices.
The effect on firms’ competitiveness of an exchange rate movement may be likened to that of a change in tariffs—see Feenstra (1989).
The OECD classification system divides sectors into four classes of technology—low, medium-low, medium-high and high—ranked according to indicators of technology intensity based on R&D expenditures (OECD 2005). For a list of the sectors used in our study, grouped by technology level, see Table 3 in the Appendix.
However, the decrease in manufacturing employment was accompanied by a 15% increase in the labour force.
For an earlier assessment of the Portuguese economy during the period 1960–2004, see Lains (2008).
When the importance of trading partners varies across sectors, sector-specific exchange rates may be more informative than aggregate exchange rate indexes as indicators of industries’ competitiveness—see, for example, Goldberg (2004), Campa and Goldberg (2001) for the US, Gourinchas (1999) for France and Alexandre et al. (2009b) for the Portuguese economy. Data for exchange rates were computed in Alexandre et al. (2009b) and are available at http://www3.eeg.uminho.pt/economia/nipe/docs/2009/DATA_NIPE_WP_13_2009.xls.
Following Ravn and Uhlig (2002), the smoothing parameter was set equal to 6.25.
The set of emerging countries includes Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, China, Chinese Taipei, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, Thailand.
Alternatively, we have included the share of non-OECD imports in Portuguese manufacturing sectors. However, this was not statistically significant in explaining employment variations. Results are available from the authors upon request.
Since we use time dummies to account for aggregate shocks, our identification strategy relies mainly on the inclusion of the sectoral exchange rates. Other sources of heterogeneity are variations in overall level of trade exposure Open j,t − 1. An alternative to the use of time dummies would be to introduce controls such as real GDP, unit labour costs, real interest rate and the oil price. However, their coefficients are not statistically significant in most of our specifications and our conclusions would remain.
An obvious alternative would be to estimate a dynamic panel data model, using adequate instrumental variables estimators. However, the inclusion of the lagged dependent variable as an additional regressor produced a statistically non-significant coefficient.
Klein et al. (2003a) measure industry openness using a five-year moving average of the ratio of total trade to total market sales.
For an empirical analysis of the effect of exchange rate movements on employment, through its effect on the cost of imported inputs, see, for example, Ekholm et al. (2008).
The results are reported in Alexandre et al. (2009a).
References
Alexandre F, Bação P, Cerejeira J, Portela M (2009a) Employment and exchange rates: the role of openness and technology. IZA discussion paper no 4191. Institute for the Study of Labor, Bonn
Alexandre F, Bação P, Cerejeira J, Portela M (2009b) Aggregate and sector-specific exchange rates for the Portuguese economy. Notas Económicas 30:6–28
Alexandre F, Bação P, Cerejeira J, Portela M (2010) Employment, exchange rates and labour market rigidities. IZA discussion paper, no. 4891. IZA—Institute for the Study of Labour, Bonn
Amador J, Cabral S, Opromolla LD (2009) A portrait of Portuguese international trade. The Portuguese economy in the context of economic, financial and monetary integration. Banco de Portugal, Lisboa
Auer R, Fischer A (2008) The effect of trade with low-income countries on U.S. industry. CEPR discussion paper series # 6819. Centre for Economic Policy Research
Berman N, Martin P, Mayer T (2009) How do different exporters react to exchange rate changes? Theory, empirics and aggregate implications. CEPR discussion paper series no 7493. Centre for Economic Policy Research
Bernard A, Jensen JB, Schott PK (2006) Survival of the best fit: exposure to low-wage countries and the (uneven) growth of US manufacturing plants. J Int Econ 86(1):219–237
Bound J, Johnson G (1992) Changes in the structure of wages in the 1980’s: an evaluation of alternative explanations. Am Econ Rev 82(3):371–392
Branson W, Love J (1988) U.S. manufacturing and the real exchange rate. In: Marston R (ed) Misalignments of exchange rates: effects on trade and industry, Chicago University Press
Burgess S, Knetter MK (1998) An international comparison of employment adjustment to exchange rate fluctuations. Rev Int Econ 6(1):151–163
Campa J, Goldberg L (2001) Employment versus wage adjustment and the US dollar. Rev Econ Stat 83(3):477–489
Davis S, Haltiwanger JC, Schuh S (1996) Job creation and destruction. MIT Press, Cambridge
Davidson R, Mackinnon JG (2003) Econometric theory and methods. Oxford University Press, New York
Ekholm K, Moxnes A, Ulltveit-Moe KH (2008) Manufacturing restructuring and the role of real exchange rate shocks: a firm level analysis. CEPR discussion paper no 6904
European Comission (2008) Euro @10. Brussels
Feenstra R (1989) Symmetric pass-through of tariff and exchange rates under imperfect competition: an empirical test. J Int Econ 27(1–2):25–45
Goldberg L (2004) Industry-specific exchange rates for the United States. Federal Reserve Bank of New York Economic Policy Review 10(1):1–16
Gourinchas P (1998) Exchange rates and jobs: what do we learn from job flows? In: Bernanke B, Rotemberg J (eds) NBER macroeconomics annual. MIT Press, Cambridge
Gourinchas P (1999) Exchange rates do matter: French job reallocation and exchange rate turbulence, 1984–1992. Eur Econ Rev 43(7):1279–1316
Klein MK, Schuh S, Triest R (2003a) Job creation, job destruction, and the real exchange rate. J Int Econ 59(2):239–265
Klein MK, Schuh S, Triest R (2003b) Job creation, job destruction and international competition. Upjohn Institute for Employment Research, Kalamazoo
Lains P (2008) The Portuguese economy in the Irish Mirror. Open Econ Rev 19(5):667–683
Lopes S (2008) Introduction, in Franco, Francesco, org., Challenges ahead for the Portuguese economy. Imprensa de Ciências Sociais, Lisboa
Machin S, Van Reenen J (1998) Technology and changes in the skill structure: evidence from seven OECD countries. Q J Econ 113(4):1215–1244
Melitz MJ (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71(6):1695–1725
OECD (2005) OECD science, technology and industry scoreboard, annex 1, OECD
Portugal Ministry of Social Security and Employment (MSSE) (1988–2006). Quadros de Pessoal. Data in magnetic media
Ravn, MO, Uhlig H (2002) On adjusting the Hodrick–Prescott filter for the frequency of observations. Rev Econ Stat 84(2):371–376
Revenga AL (1992) The impact of import competition on employment and wages in US manufacturing. Q J Econ 107(1):255–284
Wood A (1994) North–South trade, employment and inequality: changing fortunes in a skill-driven world. Clarendon Press, Oxford
Wood A (1998) Globalisation and the rise in labour market inequalities. Econ J 108(450):1453–1482
Wooldridge J (2002) Econometric analysis of cross section and panel data. MIT Press, Cambridge, MA
Author information
Authors and Affiliations
Corresponding author
Additional information
We are grateful for insightful comments and suggestions from Nicolas Berman, Delfim Neto, Ana Rute Cardoso, Miguel Lebre de Freitas, João Amador, Colin Cameron and other participants at NIPE’s seminar, and at the conferences “International Workshop on Firm and Product Heterogeneity in International Trade”, held in Brussels, “10 years of the euro: adjustment in capital and labour markets” held at University of Minho, Royal Economic Society Conference held at University of Surrey and Portuguese Economic Journal Conference held at University of Algarve. We also thank the editor and two anonymous referees for valuable comments. This paper is part of the project ‘1986–2010: A Economia Portuguesa na União Europeia’.
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Alexandre, F., Bação, P., Cerejeira, J. et al. Employment and Exchange Rates: The Role of Openness and Technology. Open Econ Rev 22, 969–984 (2011). https://doi.org/10.1007/s11079-010-9191-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11079-010-9191-z