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The Real Exchange Rate and Employment in China

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  • Mai Dao
  • Ruo Chen
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    Abstract

    We examine the impact of real exchange rate fluctuations on sectoral and regional employment in China from 1980 to 2008. In contrast to theoretical predictions, employment in both the tradable and non-tradable sectors contracts following a real appreciation. Our results are robust across different sub-samples, levels of sectoral disaggregation, and are more pronounced for regions with higher export exposure. We attribute our findings to the importance of services as intermediate input in exportable production. We test this channel of exchange rate transmission using regional input-output tables linked with employment data at the region-sector level. The results of this paper have important implications for China's labor market adjustment should the Chinese RMB strengthen in the future. To mitigate the costs of short-run labor market adjustment, appropriate demand management and structural reforms in the non-traded sectors should play an important role.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/148.

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    Length: 50
    Date of creation: 01 Jun 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/148

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    Related research

    Keywords: Employment; Labor markets; Real effective exchange rates;

    This paper has been announced in the following NEP Reports:

    References

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    1. Joshua Aizenman & Jaewoo Lee, 2008. "The Real Exchange Rate, Mercantilism and the Learning by Doing Externality," NBER Working Papers 13853, National Bureau of Economic Research, Inc.
    2. Jose Manuel Campa & Linda S. Goldberg, 2001. "Employment Versus Wage Adjustment And The U.S. Dollar," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 477-489, August.
    3. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
    4. Francesco Nucci & Alberto Franco Pozzolo, . "The Exchange Rate, Employment and Hours: What Firm-Level Data Say," Working Papers 9, Department of the Treasury, Ministry of the Economy and of Finance.
    5. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    6. Ronald Ian McKinnon & Gunther Schnabl, 2008. "China’s Exchange Rate Impasse and the Weak U.S. Dollar," CESifo Working Paper Series 2386, CESifo Group Munich.
    7. Bayoumi, Tamim & Jayanthi, Sarma & Lee, Jaewoo, 2006. "New Rates from New Weights," CEPR Discussion Papers 5860, C.E.P.R. Discussion Papers.
    8. Pierre-Olivier Gourinchas, 1998. "Exchange Rates and Jobs: What Do We Learn from Job Flows?," NBER Working Papers 6864, National Bureau of Economic Research, Inc.
    9. Linda Goldberg & Joseph Tracy, 2000. "Exchange Rates and Local Labor Markets," NBER Chapters, in: The Impact of International Trade on Wages, pages 269-307 National Bureau of Economic Research, Inc.
    10. Joseph Tracy & Linda Goldberg & Stephanie Aaronson, 1999. "Exchange Rates and Employment Instability: Evidence from Matched CPS Data," American Economic Review, American Economic Association, vol. 89(2), pages 204-210, May.
    11. Moser, Christoph & Urban, Dieter M & Weder di Mauro, Beatrice, 2008. "International Competitiveness, Job Creation and Job Destruction - An Establishment Level Study of German Job Flows," CEPR Discussion Papers 6745, C.E.P.R. Discussion Papers.
    12. Hua, Ping, 2007. "Real exchange rate and manufacturing employment in China," China Economic Review, Elsevier, vol. 18(3), pages 335-353.
    13. Simon Burgess & Michael M. Knetter, 1996. "An International Comparison of Employment Adjustment to Exchange Rate Fluctuations," NBER Working Papers 5861, National Bureau of Economic Research, Inc.
    14. Revenga, Ana L, 1992. "Exporting Jobs? The Impact of Import Competition on Employment and Wages in U.S. Manufacturing," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 255-84, February.
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    Cited by:
    1. Bonatti, Luigi & Fracasso, Andrea, 2013. "Regime switches in the Sino-American co-dependency: Growth and structural change in China," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 1-32.

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