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The Real Exchange Rate and Employment in China

  • Mai Dao
  • Ruo Chen
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    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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    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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    1. 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.
    2. Tamim Bayoumi & Jaewoo Lee & Sarma Jayanthi, 2006. "New Rates from New Weights," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 4.
    3. Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers 2005:11, Lund University, Department of Economics.
    4. 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.
    5. 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.
    6. Pierre-Olivier Gourinchas, 1999. "Exchange Rates and Jobs: What Do We Learn from Job Flows?," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 153-222 National Bureau of Economic Research, Inc.
    7. 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.
    8. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    9. 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.
    10. Linda Goldberg & Joseph Tracy, 1999. "Exchange Rates and Local Labor Markets," NBER Working Papers 6985, National Bureau of Economic Research, Inc.
    11. Alwyn Young, 2003. "Gold into Base Metals: Productivity Growth in the People's Republic of China during the Reform Period," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1220-1261, December.
    12. 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.
    13. 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.
    14. Moser, Christoph & Urban, Dieter & di Mauro, Beatrice Weder, 2010. "International competitiveness, job creation and job destruction--An establishment-level study of German job flows," Journal of International Economics, Elsevier, vol. 80(2), pages 302-317, March.
    15. Hua, Ping, 2007. "Real exchange rate and manufacturing employment in China," China Economic Review, Elsevier, vol. 18(3), pages 335-353.
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