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Relative Prices, Hysteresis, and the Decline of American Manufacturing

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  • Douglas L. Campbell

    () (New Economic School (NES))

Abstract

This study uses new measures of real exchange rates to study the collapse of US manufacturing employment in the early 2000s in historical and international perspective. To identify a causal impact of RER movements on manufacturing, I compare the US experience in the early 2000s to the 1980s, when large fiscal deficits led to a sharp appreciation of the dollar, and to Canada’s experience in the mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar. Using disaggregated sectoral data and a difference-in-difference methodology, I find that an appreciation in relative unit labor costs for the US led to disproportionate declines in employment, output, investment, and productivity in relatively more open manufacturing sectors. I also find that the impact of a temporary shock to real exchange rates is surprisingly long-lived (evidence of hysteresis), and that the appreciation of US relative unit labor costs can plausibly explain more than two-thirds of the decline in manufacturing employment in the early 2000s.

Suggested Citation

  • Douglas L. Campbell, 2016. "Relative Prices, Hysteresis, and the Decline of American Manufacturing," Working Papers w0212, Center for Economic and Financial Research (CEFIR).
  • Handle: RePEc:cfr:cefirw:w0212
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Real Exchange Rate and China's Savings
      by Doug Campbell in Douglas L. Campbell on 2017-03-15 07:49:00
    2. The Real Exchange Rates and Trade Literature
      by Doug Campbell in Douglas L. Campbell on 2017-04-07 01:50:00
    3. Is US Manufacturing Really Great Again?
      by Doug Campbell in Douglas L. Campbell on 2017-05-09 23:36:00
    4. Ben Bernanke, in Denial? "When Growth is Not Enough"
      by Doug Campbell in Douglas L. Campbell on 2017-07-09 13:14:00
    5. Ben Bernanke, in Denial? “When Growth is Not Enough”
      by ? in Naked Capitalism on 2017-07-11 10:24:00
    6. Robert Lawrence's New Manufacturing Paper: Confusing Trends and Levels
      by Doug Campbell in Douglas L. Campbell on 2017-11-16 16:13:00

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    Cited by:

    1. Campbell, Douglas L., 2016. "Measurement matters: Productivity-adjusted weighted average relative price indices," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 45-81.
    2. Muendler, Marc-Andreas, 2017. "Trade, technology, and prosperity: An account of evidence from a labor-market perspective," WTO Staff Working Papers ERSD-2017-15, World Trade Organization (WTO), Economic Research and Statistics Division.

    More about this item

    Keywords

    Exchange Rates; American Manufacturing; Hysteresis; Trade;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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