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Skill-Biased Technological Change and the Real Exchange Rate

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  • Matthias Gubler

    ()

  • Christoph Sax

    ()
    (University of Basel)

Abstract

We sketch a model that shows how skill-biased technological change may reverse the classic Balassa-Samuelson effect, leading to a negative relationship between the productivity in the tradable sector and the real exchange rate. In a small open economy, export goods are produced with capital, high-skilled and low-skilled labor, and traded for imported consumption goods. Non-tradable services are produced with low-skilled labor only. A rise in the productivity of capital has two effects: (1) It may reduce the demand for labor in the tradable sector if the substitutability of low-skilled labor and capital in the tradable sector is high; and (2) it increases the demand for non-tradables and its labor input. Overall demand for low-skilled labor declines if the labor force of the tradable sector is large relative to the labor force of the non-tradable sector. This leads to lower wages and thus to lower prices and a real exchange rate depreciation.

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Bibliographic Info

Paper provided by Faculty of Business and Economics - University of Basel in its series Working papers with number 2012/08.

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Date of creation: 2012
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Handle: RePEc:bsl:wpaper:2012/08

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Related research

Keywords: Real Exchange Rate; Balassa-Samuelson Hypothesis; Skill-biased Technological Change; General Equilibrium;

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  1. MacDonald, Ronald & Ricci, Luca Antonio, 2007. "Real exchange rates, imperfect substitutability, and imperfect competition," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 639-664, December.
  2. Matthias Gubler & Christoph Sax, 2011. "The Balassa-Samuelson Effect Reversed: New Evidence from OECD Countries," Working papers 2011/09, Faculty of Business and Economics - University of Basel.
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