Skill differentiated effects of exchange rates on job dynamics

Real exchange rate depreciation boosts domestic producers’ competitiveness in foreign markets but raises the cost of imported inputs. Do these channels affect job dynamics of skilled and unskilled workers differently? We argue, theoretically, in a production structure including skilled and unskilled workers with imported inputs, that a positive competitiveness shock from depreciation is not sufficient to increase job creation due to heterogeneous substitution effects. This finding is robust even in the presence of structural issues like labour laws and endogenous job-dynamics via search friction. Our empirical analysis of India’s formal manufacturing sector shows, depreciation in more export-oriented industries increases job creation for unskilled workers but raises job destruction for skilled workers. Conversely, industries with high imported input shares see opposite effects. Labour market liberalization mediates these skill-differentiated impacts. The paper provides interesting insights on how a given exchange rate shock can heterogeneously affect different worker types.