Exchange Rate, External Orientation of Firms and Wage Adjustment
38 Pages Posted: 12 Sep 2012
Date Written: July 2012
We estimate the effect of exchange rate movements on firm-level wages using a representative panel of manufacturing ﬁrms. We show that the direction and size of wage adjustment is shaped by the international exposure of each ﬁrm on both the sale and cost side of the balance sheet, similar to the response of employment documented in Nucci and Pozzolo (2010). Through the revenue side,wages tend to rise after a currency depreciation and the effect is more pronounced the higher is the ﬁrm’s exposure to sales from exports. Through the expenditure side, a depreciation induces a cut in the ﬁrm’s wages, and the effect is larger the higher is the incidence of imported inputs in total production costs. For a given degree of external orientation, both these effects are larger for ﬁrms with a lower market power. Moreover, we document that the effect of exchange rates on wages is shaped by (i) the extent of sectoral import penetration in the domestic market; (ii) the proportion of newly hired workers in each ﬁrm in a given year; and (iii) the composition of the ﬁrm’s workforce by occupational category.
Keywords: E24, F16, F31
JEL Classification: Exchange Rate, Firms’ Foreign Exposure, Wages
Suggested Citation: Suggested Citation