The Effect of Changes in Real Exchange Rates on Employment: Evidence from Manufacturing Industries in China, 1980–2002

This paper analyzes the effect of changes in real exchange rate on manufacturing employment. Our theoretical model predicts the positive effect of depreciation of real exchange rate on employment through a firm’s expectation on changes in real exchange rate and the interaction between real exchange rate and a firm’s import and domestic input. Using China’s manufacturing data during the 1980–2003 period, we find that depreciation of real exchange rate promotes employment growth in manufacturing industries, while change in real exchange rate is not a significant factor in promoting wage growth. We also find that an increase in export share offsets partially the effects of real exchange rate on employment and real wages. Translated from Journal of World Economy, 2005, (4): (in Chinese)     

The long-run effects of the real exchange rate on employment and wages in Canadian manufacturing

ABSTRACT

The literature on real exchange rate effects on the labour market is dominated by short-run analysis showing that there is heterogeneity in the responses of firms or industries to a real exchange rate shock. Analysing data on Canadian manufacturing industries, I conclude that there is a common long-run equilibrium across all manufacturing industries controlling for their openness to trade after varying adjustments to a real exchange rate shock have taken place. This conclusion is important from the perspective of policy making because it helps to form expectations about the effects of a real exchange rate movement on the labour market. The results suggest that real appreciation leads to economically significant reductions in employment in manufacturing in the long run. Real wages decrease in industries that are highly engaged in international trade and somewhat increase in industries that are relatively closed to international trade. Both employment and real wages converge quickly to the long-run equilibrium.     

Cointegration Tests of the Profit-maximising Equilibrium in Greek Manufacturing: 1958–91

This paper applies the recently developed cointegration techniques to test for a long-run equilibrium among real wages and the average productivity of labour as implied by profit maximisation in the Greek manufacturing sector. We find evidence for a profit-maximising equilibrium and for adjustment towards this long-run equilibrium through nominal wages and labour productivity. We have also provided an estimate of the elasticity of substitution of 0.23 which is consistent with that of other studies using alternative approaches.     

A tale of industrial stagnation from Africa

Many African economies have experienced rather dismal industrial development since the 1980s. The consensus is that African firms lack competitiveness in a world with increasing trade openness. What determines competitiveness? A well‐known explanation is that resource endowments in Africa favour land not labour, which results in high wages, especially in comparison with ‘labour abundant’ Asian economies. This paper examines the validity of this view on the basis of the case of Sudan. We demonstrate that the lack of competitiveness of manufacturing industries is not caused by high wages. Assuming a direct relationship between labour productivity and international competitiveness, we argue that acute capacity underutilisation, caused by supply‐side constraints, lowers manufacturing productivity, which in turn negatively influences competitiveness.     

Real earnings and business cycles: new evidence

In the time domain, the observed cyclical behavior of the real wage hides a range of economic influences that give rise to cycles of differing lengths and strengths. This may serve to produce a distorted picture of wage cyclicality. Here, we employ frequency domain methods that allow us to assess the relative contribution of cyclical frequency bands on real wage earnings. Earnings are decomposed into standard and overtime components. We also distinguish between consumption and production wages. Frequency domain analysis is carried out in relation to wages alone and to wages in relation to output and employment cycles. Our univariate analysis suggests that, in general, the dominant cycle followed by output, employment, real consumer and producer wages and their components is 5–7 years. Consistent with previous findings reported in the macro-level literature, our bi-variate results show that the various measures of the wage are generally not linked to the employment cycle. However, and in sharp contrast with previous macro-level studies we find strong procyclical links between the consumer wage and its overtime components and the output cycle, especially at the 5–7 years frequency.

Observed real wages are not constant over the cycle, but neither do they exhibit consistent pro- or counter-cyclical movements. This suggests that any attempt to assign systematic real wage movements a central role in an explanation of business cycles is doomed to failure. (lucas 1977)

     

Explaining production specialisation in OECD manufacturing: A study for the period 1970–1995

An analysis by means of an index of revealed comparative advantage shows that OECD manufacturing production specialisation has been substantial and rather sticky during the period 1970–1995. Global panel data regression estimates show that, of the considered variables, comparative research efforts exercise, by far, the strongest influence on production specialisation. There is also a positive impact of comparative total factor productivity, capital intensity, and even wage costs. Subdividing the sample into research and less research intensive sectors, shows that the influence of research efforts and the positive impact of wages are strongest in the research intensive part of manufacturing. Repeating estimation sector-wise suggests that, even within these groupings, there is still a degree of heterogeneity of behaviour between industries.(JEL O31, F14)     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

Trade Competitiveness and Employment: Job Creation or Job Destruction

This paper empirically examines the impact of fluctuations in international trade competitiveness on employment in the UK manufacturing sector over the period 1999–2010. We find statistically significant but economically small effects of a shock to international trade competitiveness on the level of employment. Our results show that the adjustment process in employment mainly works through job creation. We also find that compared to large firms, small firms contribute more toward job creation than job destruction. Our results that changes in GDP growth rate and average wages are significantly related to employment suggest that the UK labour market significantly responds to market forces. Finally, we find that the effect of changes in the real exchange rate on both job creation and job destruction differs between exporting and non-exporting firms.     

The substitutability between parent company and foreign affiliate employment in Europe

This paper examines the substitution pattern between parent company and foreign affiliate employment of European multinationals. The data is drawn from the AMADEUS and BANKSCOPE firm-level databases and covers parent companies in 14 high-wage European countries (EUR14) and their affiliated companies in the wider Europe including locations in the low-wage Central and East European countries (CEEC) for the period 2000–2004. We find that the substitution elasticity between employment of the EUR14 parent companies and employment in their foreign affiliates in the CEEC is quite low. Furthermore, the substitution possibilities are higher between parent company and affiliate employment in other West European countries than those between parent company and affiliate employment in the CEEC. Finally, we find that the output change of the parent company and to a lesser extent that of the foreign affiliates is more important than changes in relative wages in determining the relative labour demand.     

Working time, employment, and work sharing: Evidence from Sweden

We study three questions which are important for work sharing to increase employment. First, is there a negative long-run relation between working time and employment? Second, are hours per worker exogenous with respect to wages and employment? Third, can policy makers influence actual hours per worker? We formulate a theoretical model for employment, hours per worker, production, and real wages. A VAR model with cointegrating constraints is estimated by maximum likelihood using Swedish private sector data 1970:1–1990:4. We find (i) no long-run relation between hours per worker and employment, (ii) that hours per worker are endogenous with respect to the estimation of long-run parameters, and (iii) that legislated working time and hours per worker are related to each other in the long run. First version received: September 1997/final version accepted: June 1999     

Real wages,inflation and labour productivity in Australia

This article presents an analysis of real wages, inflation and labour productivity interrelationships using cointegration, Granger causality and, most importantly, structural change tests. Applications of tests to Australian data over the 1965 to 2007 period corroborate the presence of a structural break in 1985 and show that a 1% increase in manufacturing sector real wages led to an increase in manufacturing sector productivity of between 0.5% and 0.8%. Comparable estimates for the effect of inflation on manufacturing sector productivity have limited statistical significance. Granger causality test results suggest that real wages and inflation both Granger cause productivity in the long run.     

Estimation of the specification error in the expectations theory of the term structure

This paper tackles the issue of the procyclicality of the real wage. We present a dynamic relationship between real wages and employment consistent with the long-run stationary equilibrium using a cointegrated VAR model. We find that wages are anticyclical and that a negative relationship between real wages and employment is necessary to achieve an economically identifiable stationary long run solution. The contentiousness of the topic does not appear so important once we recall some measurement issues and economic features of the Italian labour market.     

RISING WAGES: HAS CHINA LOST ITS GLOBAL LABOR ADVANTAGE?

We document dramatic rising wages in China for the period 1978–2007 based on multiple sources of aggregate statistics. Although real wages increased seven‐fold during the period, growth was uneven across ownership types, industries and regions. Over the past decade, the wages of state‐owned enterprises have increased rapidly and wage disparities between skill‐intensive and labour‐intensive industries have widened. Comparisons of international data show that China's manufacturing wage has already converged to that of Asian emerging markets, but China still enjoys enormous labour cost advantages over its neighbouring developed economies. Our analysis suggests that China's wage growth will stabilize to a moderate pace in the near future.     

The effect of real wages and inflation on labour productivity in Malaysia

This study examines the relationship between labour productivity, real wages and inflation in Malaysia using the bounds testing approach to cointegration and also the Granger causality test. The findings of this study suggest that inflation is negatively related to labour productivity. However, the effect of real wages on labour productivity is non-linear and the two have an inverted-U shape relationship. From a policy viewpoint, the Granger causality test shows that real wages Granger-cause labour productivity, but there is no evidence of reversal causation. Hence, the Malaysian dataset supports the claims by the efficiency wage theory. Moreover, we find that inflation and labour productivity in Malaysia have bilateral causality in the short- and the long-run.     

The role of the wage-productivity gap in economic activity

This paper argues that wages lagging behind productivity is a long-run structural phenomenon due to the interplay of wage dynamics and productivity growth. We call this interplay frictional growth, a term that can only be nullified in the utopian case of zero growth and/or no dynamics. In that vein, we challenge the prevailing view of the neutrality of the labour income share and investigate its impact on the evolution of employment. We thus estimate wage setting and labour demand equation systems – for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960–2008 period – and find that the labour share is negatively associated with employment even when the conventional assumption of a unitary long-run elasticity of wages with respect to productivity holds. Acknowledging the presence of the wage-productivity gap in both the short and long run, this work stands as the building block for assessing the effect of the falling labour share on economic activity. As recent work has shown that the widening wage gap is also an important factor prompting inequality, it can be argued that by supporting employment the falling labour share ‘sweetens’ the impact of rising income inequality, and, as such, deserves the attention of policy makers.     

Sectoral Energy- and Labour-Productivity Convergence

This paper empirically investigates the development of cross-country differences in energy- and labour productivity. The analysis is performed at a detailed sectoral level for 14 OECD countries, covering the period 1970–1997. A σ-convergence analysis reveals that the development over time of the cross-country variation in productivity performance differs across sectors as well as across different levels of aggregation. Both patterns of convergence as well as divergence are found. Cross-country variation of productivity levels is typically larger for energy than for labour. A β-convergence analysis provides support for the hypothesis that in most sectors lagging countries tend to catch up with technological leaders, in particular in terms of energy productivity. Moreover, the results show that convergence is conditional, meaning that productivity levels converge to country-specific steady states. Energy prices and wages are shown to positively affect energy- and labour-productivity growth, respectively. We also find evidence for the importance of economies of scale, whereas the investment share, openness and specialization play only a modest role in explaining cross-country variation in energy- and labour-productivity growth.      

Import competition,employment and wage in US manufacturing: new evidence from multivariate panel cointegration analysis

This paper examines whether employment and wages in the US manufacturing sector exhibit any long-run relationship with import competition. The results based on a multivariate panel cointegration analysis of observations on 12 two-digit SIC manufacturing industries over the period from the third quarter of 1982 to the fourth quarter of 1992 indicate that US manufacturing employment does not bear a long-run relationship with import competition but manufacturing wage does. While the long-run correlation between import price and manufacturing wage is found to be sector sensitive panel estimation reveals a highly significant negative correlation between import price and manufacturing wage.     

The impact of financial constraints on firm survival and growth

We propose a new approach for identifying and measuring the degree of financial constraint faced by firms and use it to investigate the effect of financial constraints on firm survival and development. Using panel data on French manufacturing firms over the 1996–2004 period, we find that (1) financial constraints significantly increase the probability of exiting the market, (2) access to external financial resources has a positive effect on the growth of firms in terms of sales, capital stock and employment, (3) financial constraints are positively related with productivity growth in the short-run. We interpret this last result as the sign that constrained firms need to cut costs in order to generate the resources they cannot raise on financial markets.     

Detecting policy effects with wage rigidity and instability – evidence on the Taiwan labour market

With stagnant wages and growing productivity, a widening gap is becoming prevalent in global labour markets. The relationship between wages and productivity has become indeterminate, especially after the 2008 financial crisis. This article presents the phenomenon for why salary rarely follows up with productivity after an economy recovers. By using the GMM method, this study shows the interaction among wage, productivity and tightness, in which we illustrate the Taiwan labour market as an example to show how hiring system changes press wages away from an efficient allocation, causing instability and market failure. Surveying 35 labour markets for different industries, we reveal that the situation in the labour markets has drastically changed since 2008. We find that this resulted in a severe problem when the Taiwan firms got used to policies like ‘22K’, ‘fix-term contract’ and ‘unpaid leave’ programmes. These plans negatively impacted the economy and raised market failure with instability.     

Wages and productivity: the role of labour market institutions in OECD countries

In the context of a monetary union, to keep a territorial equilibrium in terms of economic activity and employment, the relationship between real wages and productivity is crucial. In this paper, empirical evidence about the response of wages to productivity is obtained for 20 OECD countries and the role of labour market institutions to explain differences in this response is analysed.