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Employment Adjustments in High-Trade-Exposed Manufacturing in Canada

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  • Serge Coulombe

    () (Department of Economics, University of Ottawa)

Abstract

The study presents a model and estimates the dynamic response of employment in high-trade-exposed manufacturing to the Canadian dollar’s appreciation. The evolution of employment shares of high-trade-exposed manufacturing for the 10 provinces from 1987 to 2006 is captured using a general error correction model. This model is estimated using state-of-the-art time-series–cross-sectional (TSCS) data econometrics. The main finding of the study is that a substantial part of the adjustment to the Canadian dollar’s appreciation since 2002 had already been completed in Canadian high-trade-exposed manufacturing industries by July 2007. However, simulation results suggest further employment losses in these industries if the value of the Canadian dollar remains around US$0.95. The reason for these further losses is that employment share does not adjust immediately to movements in the exchange rate. Estimates from the models indicate that between 60 percent and 70 percent of the adjustment to exchange rate movements is completed after two years. Consequently, most of the adjustment that still needs to be done results from the appreciation of the Canadian dollar thus far in 2007. The results also suggest that the effect of movements in the real exchange rate on employment in high-trade-exposed manufacturing is highly heterogeneous across provinces. Not surprisingly, the results suggest that the effect would be greater and particularly significant in Quebec and Ontario. If the dollar remains around US$0.95, simulation results suggest that the proportion of the adjustment that still needs to be done (July 2007) is less in Quebec (between 18 percent and 26 percent) and Ontario (between 27 percent and 33 percent) than in Canada as a whole (between 30 percent and 36 percent). If the Canadian dollar remains at or around parity with the U.S. dollar, the proportion of the adjustment still remaining increases to the 31 percent and 37 percent range for Quebec, 39 percent and 43 percent range for Ontario, and 42 percent and 46 percent range for Canada as a whole. There is a considerable amount of risk involved in simulation exercises of this type. The risks are related to uncertainty regarding the future evolution of two key variables of the models: the value of the Canadian dollar, and the evolution of the U.S. economy. Risk also results from model uncertainty.

Suggested Citation

  • Serge Coulombe, 2008. "Employment Adjustments in High-Trade-Exposed Manufacturing in Canada," Working Papers 0803E, University of Ottawa, Department of Economics.
  • Handle: RePEc:ott:wpaper:0803e
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    File URL: http://sciencessociales.uottawa.ca/economics/sites/socialsciences.uottawa.ca.economics/files/0803E.pdf
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    References listed on IDEAS

    as
    1. Michel Beine & Serge Coulombe, 2007. "Economic integration and the diversification of regional exports: evidence from the Canadian--U.S. Free Trade Agreement," Journal of Economic Geography, Oxford University Press, vol. 7(1), pages 93-111, January.
    2. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September.
    3. 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.
    4. Danny Leung & Terence Yuen, 2007. "Labour Market Adjustments to Exchange Rate Fluctuations: Evidence from Canadian Manufacturing Industries," Open Economies Review, Springer, vol. 18(2), pages 177-189, April.
    5. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
    6. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    7. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    8. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    9. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    10. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
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    More about this item

    Keywords

    Exchange rate; labor market adjustments; Dutch disease; Kiviet adjustment; Canadian provinces;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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