WAGE ADJUSTMENT: Labor Markets and Exchange Rates 5

Posted by Kathryn Schwartz on August 30, 2014
WAGE ADJUSTMENT

For instance, a purely transitory movement in the exchange rate gives rise to a change in labor demand that is (1 – 5gm) w6749-9
From this system of equations we have key insights into features of the equilibrium wage and employment response to shocks.13 Specifically, (i) Industries with higher labor supply elasticity with respect to wages have smaller wage adjustments and larger employment adjustments; (ii) Industries with higher labor demand elasticity with respect to wages have smaller wage and employment responsiveness to shocks; (iii) Industries with less elastic product demands have more responsive wages and employment; (iv) The wage and employment effects of exchange rate movements are increasing in industry export orientation and home market import penetration; and (v) The scale of wage and employment response to exchange rates has an ambiguous relationship with industry use of imported productive inputs.

The Data and Regression Specification.

The system of equations provided by (13) are the basis for our estimating equations. We use annual industry data for the U.S. labor market variables and the trade shares for the interval 1972 through 1995. Our equations are estimated in first differences, and include common time trends and industry dummy variables. We run the regressions using pooled groups of two-digit manufacturing industries, and separately for the individual manufacturing industries.

We have conducted our estimation using two alternative exchange rate series. The first series is a real multilateral exchange rate index, defined as the dollars per foreign currency: an increase in the index implies a real depreciation of the dollar. The second series is a set of industry-specific real exchange rates for exports and for imports computed as a weighted average of the bilateral real exchange rates of the United States with its major trading partners in each industry. The weights used are the annual shares of U.S. imports and U.S. exports in each industry from the 19 major trading partners of the United States (see Goldberg and Tracy 1998). In the regressions, both types of real exchange rate measures yield qualititatively similar results. In our exposition, we present only the results using the single real multilateral exchange rate measure. same day payday loans online

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