The Exchange Rate, Employment and Hours: What Firm-Level Data Say
Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 9
50 Pages Posted: 11 Jan 2010
Date Written: January 11, 2010
Using a representative panel of manufacturing firms, we estimate the response of job and hours worked to currency swings, showing that it depends primarily on firms’ exposure to foreign sales and their reliance on imported inputs. We also show that, for given international exposure, the response to exchange rate fluctuations is magnified when firms exhibit a lower monopoly power and when they face foreign pressure in the domestic market through import penetration. The degree of substitutability between imported and other inputs and the distribution of workers by type introduce additional degrees of specificity in the employment sensitivity to exchange rate swings. We show that firms’ export status and episodes of entry and exit in the export market are associated with a heterogeneous employment response to exchange rate variations. Wage adjustments are shown to provide a channel through which firms react to currency shocks. Finally, gross job fiows within the firm are found to react to exchange rate fluctuations, but the effect on job creation is predominant.
Keywords: Employment, exchange rate, firms’ foreign exposure
JEL Classification: E24, F16, F31
Suggested Citation: Suggested Citation