The Dilemma of One Currency Area: the Interactive Effects of Currency Overvaluation and Labor Market Rigidity on Export

70 Pages Posted: 15 Nov 2022

See all articles by Han Gao

Han Gao

Central University of Finance and Economics (CUFE)

Jie Li

Central University of Finance and Economics (CUFE)

Ming Lu

Shanghai Jiao Tong University (SJTU)

Guo Yan

affiliation not provided to SSRN

Rudai Yang

Peking University - School of Economics

Date Written: October 26, 2022

Abstract

We characterize the dilemma of one currency area: the common currency’s value is overvalued for regions with poor fundamentals, which hampers export. With labour market rigidity, they cannot reduce labour costs to restore its growth, leading to further reduction of exports. Using Chinese firm-level data, we show that RMB overvaluation restricts firms’ exports. The effect is more profound for exporters located in cities with higher minimum wage growth rates and shows up in both intensive and extensive margins of Chinese exporters. We further observe that impact differs in terms of the regions that firms are located, years of implementing minimum wage standards, and firm characteristics, including import status, ownership, and firm performance. Our findings are generally robust to alternative measures of variables, subsamples, correction for sample selection bias, and endogeneity issues.

Keywords: Exports; Exchange rates misalignment; Minimum Wage Standards; China

JEL Classification: F1; G2

Suggested Citation

Gao, Han and Li, Jie and Lu, Ming and Yan, Guo and Yang, Rudai, The Dilemma of One Currency Area: the Interactive Effects of Currency Overvaluation and Labor Market Rigidity on Export (October 26, 2022). Available at SSRN: https://ssrn.com/abstract=4266504 or http://dx.doi.org/10.2139/ssrn.4266504

Han Gao

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Jie Li (Contact Author)

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Ming Lu

Shanghai Jiao Tong University (SJTU) ( email )

800 Dongchuan Rd
Minhang, Shanghai 200240
China

Guo Yan

affiliation not provided to SSRN

Rudai Yang

Peking University - School of Economics ( email )

Yiheyuan Road
the school of economics builiding
Beijing, 000000
China

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