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Exchange Rate, External Orientation of Firms and Wage Adjustment

  • Nucci, Francesco
  • Pozzolo, Alberto Franco

We estimate the effect of exchange rate movements on ï¬rm-level wages, using a representative panel of manufacturing ï¬rms. We show that the direction and size of wage adjustment is shaped by the international exposure of each ï¬rm 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 ï¬rm’s exposure to sales from exports. Through the expenditure side, a depreciation induces a cut in the ï¬rm’s 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 ï¬rms 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 ï¬rm in a given year; and (iii) the composition of the ï¬rm’s workforce by occupational category.

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Paper provided by University of Molise, Dept. EGSeI in its series Economics & Statistics Discussion Papers with number esdp12066.

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Date of creation: 23 Apr 2012
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Handle: RePEc:mol:ecsdps:esdp12066
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  1. Jiawen Yang, 1992. "Exchange Rate Pass-Through in U.S. Manufacturing Industries," Working Papers 92-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Jose Manuel Campa & Linda S. Goldberg, 1998. "Employment versus wage adjustment and the U.S. dollar," Staff Reports 56, Federal Reserve Bank of New York.
  3. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  4. Hilderth, A.K. & Oswald, A.J., 1993. "Rent-Sharing and Wages: Evidence form Company and Establishment Panels," Economics Series Working Papers 99154, University of Oxford, Department of Economics.
  5. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
  6. 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.
  7. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  8. Mahmood Arai, 2003. "Wages, Profits, and Capital Intensity: Evidence from Matched Worker-Firm Data," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 593-618, July.
  9. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
  10. Jose Campa & Linda S. Goldberg, 1995. "Investment, Pass-Through and Exchange Rates: A Cross-Country Comparison," NBER Working Papers 5139, National Bureau of Economic Research, Inc.
  11. Michael W. Klein & Scott Schuh & Robert K. Triest, 2000. "Job Creation, Job Destruction, and the Real Exchange Rate," NBER Working Papers 7466, National Bureau of Economic Research, Inc.
  12. Francesco Nucci & Alberto Franco Pozzolo, 2009. "Exchange Rate, Employment and Hours: What Firm-Level Data Say," Mo.Fi.R. Working Papers 12, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
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