WAGE ADJUSTMENT: Summary and Concluding Remarks

Posted by Kathryn Schwartz on September 13, 2014

In this paper we have examined the effects of exchange rate movements on employment and wages for manufacturing industries in the United States. Exchange rate movements affect the marginal revenue product of labor, and as a result, industry labor demand to the extent that these exchange rate movements affect the marginal profitability of firms in an industry. The paper argues that these movements in the marginal revenue product of labor will depend on the form of external exposure of each particular industry Link.

The effects of an exchange rate movement will be increasing in the export orientation of the industry, the amount of import competition, and the reliance on imported inputs into production of the industry. Other industry characteristics such as an industry’s competitive structure, the composition of its labor force, and the characteristics of the production process will also determine the expected size of labor adjustment to an exchange rate shock.

We empirically estimated the effects of exchange rate changes on four different measures of labor market activity: wages and employment, and overtime employment and wages. The results indicate that labor market adjustments to exchange rate movements tend to be small but statistically significant. We find an average wage elasticity to exchange rates of 0.04 over 1972 to 1995, which is in line with other estimates from import competition studies (Revenga 1992, Slaughter and Swagel 1998).

We also find that the importance of exchange rates for wages has been growing over time. This reflects the more rapid growth of export markets compared with the growth of imported input use in production. Our estimates of employment elasticities are significantly lower (0.01 on average). This low employment elasticities are consistent with larger elasticities at a more disaggregated industry level and a large amount of employment reallocation within a 2-digit industry (Davis and Haltiwanger 1997).

Industry-specific elasticities of response to exchange rate movements are significantly correlated with the skill composition of workers in an industry and the competitive structure of the industry. Industries with a higher proportion of college-educated workers observe higher wage elasticities and lower employment elasticities of response to exchange rates, despite the fact that the skill-intensive industries tend to be more export oriented. The reason may be that skill intensive industries have relatively higher costs of hiring or firing workers.

We also find that high price-over-cost markup industries and more skill-intensive industries, also have relatively larger overtime wage and employment responses to exchange rates. On the margin, more skill intensive industries use overtime activity rather than hiring and firing workers, or changing basic compensation. We find other indicators of industry characteristics — unionization rates, and capital intensities — to be uncorrelated with the size of industry response to exchange rates.

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