Exchange Rate, External Orientation of Firms and Wage Adjustment

23 Pages Posted: 22 Nov 2014

See all articles by Francesco Nucci

Francesco Nucci

University of Rome I

Alberto F. Pozzolo

Università degli Studi di Roma Tre

Multiple version iconThere are 2 versions of this paper

Date Written: November 2014

Abstract

We estimate the effect of exchange rate movements on firm‐level wages, using a representative panel of Italian 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, Journal of International Economics 2010; 82: 112.). 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 the extent of sectoral import penetration in the domestic market.

Suggested Citation

Nucci, Francesco and Pozzolo, Alberto F., Exchange Rate, External Orientation of Firms and Wage Adjustment (November 2014). The World Economy, Vol. 37, Issue 11, pp. 1589-1611, 2014. Available at SSRN: https://ssrn.com/abstract=2529519 or http://dx.doi.org/10.1111/twec.12200

Francesco Nucci (Contact Author)

University of Rome I ( email )

Piazzale Aldo Moro
Rome, 00185
Italy
+39 06 4991 0847 (Phone)
+39 06 445 3246 (Fax)

Alberto F. Pozzolo

Università degli Studi di Roma Tre ( email )

Via Ostiense 163
Roma, RM 00154
Italy

HOME PAGE: http://www.uniroma3.it/

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