Employment and Exchange Rates: The Role of Openness and Technology

Abstract

Real exchange rate movements are important drivers of the reallocation of resources between sectors of the economy. Economic theory suggests that the impact of exchange rates should vary with the degree of exposure to international competition and with the technology level. We show that both the degree of openness and the technology level mediate the impact of exchange rate movements on labour market developments. According to our estimations, whereas employment in hightechnology sectors seems to be relatively immune to changes in real exchange rates, these appear to have sizable and significant effects on highly open low-technology sectors. The analysis of job flows suggests that the impact of exchange rates on these sectors occurs through employment destruction.

The Effect of Exchange Rate Movements and Economic Growth on Job Creation

“…These results confirm results by Mpofu (2013) and Bhorat et al (2014) of a significant negative relationship between the two variables where an depreciation in the rand decreases employment growth, while an appreciation in the rand promotes job creation. Significant employment effects of changes in the real exchange rate correspond with results by Alexandre (2011) in low technology sectors, whereas these findings where however offset by a non-compliance of employment towards exchange rate movements in high technology sectors. Simply indicating the negative effects of capital intensive other than employment intensive production on employment growth.…”

“…Economic theory asserts that fluctuations in the exchange rate, resulting in foreign goods and domestic price changes, may affect the reallocation of resources within economic sectors (Alexandre et al, 2011). Thus job flows tend to be highly sensitive to changes in relative prices and exchange rate fluctuations, as trade liberalisation (openness) is accompanied by extreme demand volatility and shocks to firms (Haltiwanger et al, 2004).…”

“…Similarly, a significant effect of the exchange rate and employment levels were observed in Ghana's manufacturing sector, such that a depreciation in Ghana's currency inhibited the level of job creation (Mensah et al, 2013). Moreover, Alexandre et al (2011) noted that employment in technology driven sectors is relatively resistant to movements in the real exchange rates. Ngandu (2009) analysed the effect of movements in the exchange rate on employment in South Africa using the computable general equilibrium model (an economy-wide approach).…”

Exchange Rates, Employment and Labour Market Rigidity

“…In the same vein, Alexandre et al. () present estimations that suggest that both the degree of openness and the technology level mediate the impact of exchange rate movements on employment fluctuations. In particular, these authors conclude that employment in more open sectors that use low‐technology levels is more sensitive to exchange rate variations.…”

“…In Alexandre et al. (), the technology level is viewed as a proxy for productivity, with low‐technology sectors associated to lower productivity levels on average. Nevertheless, an alternative interpretation is that the technology level is also a good proxy for market structure: depending on how one views the direction of causation, firms in concentrated markets generate more R&D, or high technology grants market power to the firms that use it – see the discussion in Sutton ().…”