WAGE ADJUSTMENT: Introduction

Posted by Kathryn Schwartz on August 16, 2014
WAGE ADJUSTMENT

We know that exchange rates matter. The challenge is pinning down the exact channels for exchange rate effects and their range of specific implications for the real economy. This paper examines the effects of exchange rates on employment, wages, and overtime activity over the past twenty-five years for manufacturing industries of the United States. Two economic trends have been persistent during this period: an increase in the external orientation of the U.S. manufacturing sector and large movements in exchange rates. The goal of this paper is to identify the effects that these exchange rate movements have had on U.S. manufacturing jobs and wages given the changing external orientation of U.S. industries.

Our evidence supports a statistically significant response of industry wages to exchange rate changes, and a very weak statistical relationship between numbers of jobs and employment and dollar movements. The average wage elasticity to a permanent exchange rate change for all manufacturing during this period was 0.04, while the average employment elasticity was only 0.01. We also identify two particular industry features that are associated with the relative importance of exchange rates: the industry competitive structure, and the skill level of its labor force.

Low-markup industries -industries like textiles, lumber and wood products, and primary metal or fabricated metal products- have a more significant response to exchange rate than high-markup industries. The wage elasticities of response are larger in industries that are more export-oriented and are reduced (and can even turn negative) for industries that rely more heavily on imported productive inputs. Industries with a higher proportion of college-educated workers in their labor force also have higher wage and lower employment elasticities to exchange rates.

We also look at the effects of exchange rate movements on overtime activity in these industries. We find statistically significant effects of exchange rate changes on overtime hours and overtime wages. The elasticity of overtime wage to exchange rate changes is small and negative for most industries, averaging -0.02. The overtime hour and wage elasticities are higher in industries with more skilled workforces and in low-markup industries.

Our results — on significant wage response and weak employment response — differ from those of earlier studies linking exchange rates to labor markets. Branson and Love (1987, 1988), using data for the 1970s and early 1980s, found that real exchange rate movements influenced manufacturing sector employment: dollar appreciations (depreciations) were associated with significant output and employment losses across mainly durable goods sectors. no fax payday loans

Tags: , ,