Effects of the exchange rate on sectoral profits, value added, wages and employment

• Author / Creator

  He, Wei

• This paper investigates the three channels through which real exchange rate variations affect the economy, namely, a profit channel, a value added channel, and a labor-market channel. In this study, both aggregate and sector-level data for 20 OECD countries and a panel-version of the Autoregressive distributed lag – Error-correction model (ARDL-ECM) proposed by Pesaran et al. (2001) are used to examine the responses of real profits, real value added, real wages and employment to movements in the real exchange rate. According to the estimation results, a real currency depreciation, defined as an increase in the real exchange rate, tends to raise real profits for two tradable-good sectors, namely, Agriculture, hunting, forestry and fishing, and Manufacturing, five of the manufacturing subsectors, Total economy, and even two non-tradable-good sectors and two service sector aggregates. However, a negative exchange rate impact on the long-run real profits of Construction and insignificant responses of the other non-tradable-good sectors are also observed. By further examining the exchange rate influences on value added volumes, I find that a real currency depreciation tends to have similar effects on value added volumes as on real profits. As for real wages and employment, a real currency depreciation depresses real wages for both tradable- and non-tradable-good sectors. Employment tends to rise as domestic currency depreciates for Manufacturing and two of its subsectors in the short run, and drop for Construction, and Total services. Thus, one can conclude that a real currency depreciation more often raises profits for the tradable-good sectors, with real value added growth plus the fall in real labor compensation explaining the positive growth in real profits. For the non-tradable-good sectors, two cases should be considered: for Construction, a real currency depreciation causes real value added to drop more than does real labor compensation, resulting in a profit contraction in the long run. For the other non-tradable-good sectors and aggregates, real value added either is unresponsive to real exchange rate variations, or contracts less than does total real labor compensation, thus giving rise to either insignificant or positive profit responses to real exchange rate movements.

• Subjects / Keywords

  • Exchange rate
  • profits
  • value added
  • wages
  • employment
  • OECD countries

• Graduation date

  Fall 2011

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/R38973

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.