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Exchange Rate, External Orientation of Firms and Wage Adjustment

Author

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  • Francesco Nucci

    (La Sapienza University of Rome)

  • Alberto Franco Pozzolo

    (Universita' degli Studi del Molise)

Abstract

We estimate the effect of exchange rate movements on firm-level wages, using a representative panel of manufacturing firms. We show that the direction and size of wage adjustment is shaped by the international exposure of each firm on both the sale and cost side of the balance sheet, similar to the response of employment documented in Nucci and Pozzolo (2010). Through the revenue side, wages tend to rise after a currency depreciation and the effect is more pronounced the higher is the firmÕs exposure to sales from exports. Through the expenditure side, a depreciation induces a cut in the firmÕs wages, and the effect is larger the higher is the incidence of imported inputs in total production costs. For a given degree of external orientation, both these effects are larger for firms with a lower market power. Moreover, we document that the effect of exchange rates on wages is shaped by (i) the extent of sectoral import penetration in the domestic market; (ii) the proportion of newly hired workers in each firm in a given year; and (iii) the composition of the firmÕs workforce by occupational category..

Suggested Citation

  • Francesco Nucci & Alberto Franco Pozzolo, 2012. "Exchange Rate, External Orientation of Firms and Wage Adjustment," Working Papers CASMEF 1208, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    • Handle: RePEc:lui:casmef:1208
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    Cited by:

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    More about this item

    Keywords

    Exchange Rate; FirmsÕ Foreign Exposure; Wages.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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