The Real Exchange Rate and Employment in China

IMF Working Papers, June 1, 2011

Source details

Authors: Mai Dao, Ruo Chen
Date: June 1, 2011
Scope: Impact of real exchange rate fluctuations on sectoral and regional employment in China from 1980 to 2008.
Main empirical result: Employment in both the tradable and non-tradable sectors contracts following a real appreciation.
Robustness: Results hold across different sub-samples and levels of sectoral disaggregation, and are more pronounced for regions with higher export exposure.
Proposed transmission channel: Importance of services as intermediate input in exportable production; tested using regional input-output tables linked with employment data at the region-sector level.

Employment contracts in both tradable and non-tradable sectors following a real appreciation (1980–2008).
Effects are:
- Robust across sub-samples.
- Robust across different levels of sectoral disaggregation.
- More pronounced in regions with higher export exposure.
Empirical channel evidence:
- Services operate as important intermediate inputs in exportable production, providing a mechanism for exchange rate impacts to affect non-tradable sector employment.

Period covered: 1980 to 2008.
Data and tests:
- Regional input-output tables linked with employment data at the region-sector level to test the intermediate-input channel.
- Sectoral and regional employment analysis across varying levels of disaggregation and sub-samples.

Labor market adjustment: Results have important implications for China’s labor market adjustment if the Chinese RMB strengthens in the future.
To mitigate short-run labor market adjustment costs:
- Appropriate demand management should play an important role.
- Structural reforms in the non-traded sectors should play an important role.