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Exchange Rate, External Orientation of Firms and Wage Adjustment

  • Francesco Nucci

    ()

    (Sapienza, Universita' di Roma)

  • Alberto Franco Pozzolo

    ()

    (Universita' del Molise)

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

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File URL: http://www.dss.uniroma1.it/RePec/sas/wpaper/20123_NP.pdf
File Function: First version, 2012
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Paper provided by Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome in its series DSS Empirical Economics and Econometrics Working Papers Series with number 2012/3.

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Length: 37 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:sas:wpaper:20123
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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  7. 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.
  8. Campa, Jose & Goldberg, Linda, 1995. "Investment, Pass-Through and Exchange-Rates: A Cross-Country Comparison," Working Papers 95-14, C.V. Starr Center for Applied Economics, New York University.
  9. 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.
  10. Blanchflower, David G & Oswald, Andrew J & Sanfey, Peter, 1996. "Wages, Profits, and Rent-Sharing," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 227-51, February.
  11. 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.
  12. 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.
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