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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
Date of revision:
Handle: RePEc:mol:ecsdps:esdp12066
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  1. 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.
  2. 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.
  3. Jose Manuel Campa & Linda S. Goldberg, 1996. "Investment, pass-through, and exchange rates: a cross-country comparison," Staff Reports 14, Federal Reserve Bank of New York.
  4. Andrew K.G. Hildreth and Andrew J. Oswald, . "Rent-Sharing and Wages: Evidence from Company and Establishment Panels," Economics Discussion Papers 425, University of Essex, Department of Economics.
  5. 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.
  6. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  7. Pozzolo, Alberto Franco & Nucci, Francesco, 2008. "Exchange Rate, Employment and Hours: What Firm-Level Data Say," Economics & Statistics Discussion Papers esdp08049, University of Molise, Dept. EGSeI.
  8. Jose Manuel Campa & Linda S. Goldberg, 1998. "Employment versus Wage Adjustment and the US Dollar," NBER Working Papers 6749, National Bureau of Economic Research, Inc.
  9. repec:tpr:qjecon:v:111:y:1996:i:1:p:227-51 is not listed on IDEAS
  10. Michael W. Klein & Scott Schuh & Robert K. Triest, 1999. "Job creation, job destruction, and the real exchange rate," Working Papers 99-11, Federal Reserve Bank of Boston.
  11. 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.
  12. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
  13. repec:tpr:qjecon:v:107:y:1992:i:1:p:255-84 is not listed on IDEAS
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