The impact of real exchange rate fluctations on employment and wages in eighteen different manufacturing industries in the United States: An error correction model approach analysis

This dissertation discusses the effects of exchange rate volatility on wages and&#13;\nemployment in 18 different U.S. manufacturing industries with an error correction model&#13;\napproach. Innovative from prior research, this research project is more industry-specific.&#13;\nThe implication of exchange rate fluctuations for the labor market is indeterminate.&#13;\nOn one hand, domestic currency depreciation facilitates a firm’s exports and thus&#13;\nincreases its wages and employment; on the other hand, currency depreciation increases a&#13;\nfirm’s cost of production and generates loss of its profitability. Thus, a firm will&#13;\nexperience an expansion or a contraction due to the currency depreciation.&#13;\nPrevious studies have investigated the effect of exchange rate volatility on industry&#13;\nwages and employment by using the aggregate trade-weighted real exchange rate&#13;\nindexes— i.e., the Board of Governors of the Federal Reserve System’s broad real&#13;\nexchange rates and the real effective exchange rates. Because the real exchange rate&#13;\nindexes consider the entire U.S. trade shares, they are not specific enough to study this&#13;\neffect on each different industry. In order to remedy this weakness, this dissertation&#13;\ninstead uses the trade-weighted industry-specific real exchange rate index to study this&#13;\nissue. This type of real exchange rate takes each trade partner of the United States in a&#13;\nspecific sector into account; thus this study has a more precise analysis and more robust&#13;\nresults than previous studies.&#13;\nIn addition, this dissertation is the first study to construct the trade-weighted&#13;\nindustry-specific real interest rate differentials and confirm the mean-reverting property&#13;\nof the differentials. This finding suggests that trade weights in each sector affect a firm’s profit in holding a currency. Further, this dissertation computes a new type of real&#13;\nexchange rate based on the trade-weighted industry-specific real interest differentials and&#13;\nexplains how an industry’s wages and employment are affected by exchange rate&#13;\nmovements when using this new type of exchange rate.&#13;\nEmpirical results of this dissertation show that movements of the two types of tradeweighted&#13;\nindustry-specific real exchange rates have a significant effect on employment&#13;\nand real wages, and the response differs quantitatively and qualitatively across industries.&#13;\nIn particular, this effect is found in some of the lower markup and higher markup&#13;\nindustries, which indicates that an industry’s pricing power in the market appears to&#13;\nweakly affect its growth rates of employment and wages when facing an exchange rate&#13;\nshock. Moreover, some of these industries generate positive responses on wages when&#13;\nexperiencing unforeseen real dollar depreciation, which reflects the fact that wage growth&#13;\nhas been closely related to exchange rate movements since the 1980s.

Topic: Hermeneutics and Narrative Identity
Subfield: Philosophy
Field: Arts and Humanities
Domain: Social Sciences