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Dollarization, Economic Growth, and Employment

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  • Raimundo Soto

    ()
    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

Dollarization brought economic stability to Ecuador and higher economic growth. The labor market has not reacted accordingly and unemployment rates remain stubbornly around 10%. I use a simple econometric model of the labor market to disentangle the impact on employment of GDP growth, real wages, the cost of capital, and the real exchange rate. I found two opposing effects at work. On one hand, vigorous economic growth has led to a substantial expansion of labor demand (scale effect). On the other hand, changes in relative factor prices brought about by the dollarization process have played against employment creation (substitution effects): real minimum wages have increased while at the same time the real price of imported intermediate goods and the cost of capital have declined steadily. Together, these price changes indicate that labor is becoming a more expensive factor of production and, thus, signal for substituting labor away.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 338.

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Date of creation: 2008
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Handle: RePEc:ioe:doctra:338

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Keywords: Dollarization; employment; economic growth;

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  1. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  2. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  3. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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