Exchange Rate Volatility and Employment Growth in Developing Countries: Evidence from Turkey

Abstract

Employing a unique panel of 691 private firms that accounted for 26% of total valueadded in manufacturing in Turkey, the paper explores the impacts of exchange rate volatility on employment growth during the period of 1983 -2005. The empirical analysis using a variety of specifications, estimation techniques, and robustness tests suggests that exchange rate volatility has a statistically and economically significant employment growth reducing effect on manufacturing firms. Using point estimates, the results suggest that for an average firm a one standard deviation increase in real exchange rate volatility reduces employment growth in the range of 1.4 -2.1 percentage points. JEL Classification Codes: F31, E24, L6

Does Trade Foster Employment Growth in Emerging Markets? Evidence from Turkey

“…In particular, our study adds to previous empirical work on Turkey (Demir, 2010(Demir, , 2013Meschi, Taymaz, & Vivarelli, 2011;Yasar & Morrison Paul, 2008) by providing, for the first time, comprehensive evidence regarding the causal effects of importing, exporting, and joint importing and exporting on firm level labor demand, using recent and representative data. The empirical strategy we adopt is based on a combination of Multiple Propensity Score Matching (MPSM) and Difference-in-Differences (DID) estimation.…”

“…For the manufacturing sector as a whole, Meschi et al (2011) find that between 1992 and 2001, both exporters and firms belonging to sectors experiencing increasing inflows of foreign inputs from advanced countries displayed higher skilled labor costs as a share of total labor costs. Turning to the evidence on firm employment levels, in an analysis of the impact of exchange rate volatility on firm growth, based on a sample of about 500 of the largest Turkish firms, Demir (2010Demir ( , 2013 4 find a negative direct relationship between firm exports and employment growth, although the relationship is shown to be barely significant under sensitivity checks.…”

“…Indeed, no previous work has dealt with firm level importing and exporting simultaneously and none has identified a causal effect of trade on firm labor demand. As for the contemporaneous analysis of firm level import and export activities, Yasar and Morrison Paul (2008) do not address firm level exports in their analysis, while Demir (2010Demir ( , 2013 do not account for imports. Meschi et al (2011) test for both export and import measures, but the import indicator used in the analysis is at the sector level and their focus is limited to the firm skill ratio.…”

“…Thus, they test how relative skilled labor demand differs across firms in sectors with heterogeneous imported input exposures, but not the consequences of the firms' decision to import. Turning to the question of causality, only Demir (2010Demir ( , 2013 show some concern about the endogeneity of their export measure and, as an assessment of the impact of exporting is not their main focus, this concern is addressed by testing for the effects of the export share lagged one year. However, this expedient may not prove sufficient to identify the causal effect of exporting on employment growth.…”

Employment and exchange rate volatility relationship: the Turkish case

“…A 1% exchange rate decrease causes to 0,61% increase in employment. Mpofu (2013) South Africa (1995-2010 The effects of real exchange rate volatility on employment in manufacturing sector.…”