Real exchange rate and employment in the manufacturing sector in China

Abstract

In this paper, the impact of real exchange rate on employment is theoretically investigated. Three channels are identified. 1. Capital/labor intensity channel: the real appreciation, which decreases the cost of imported inputs and increases real wages expressed in tradable goods, exerts a negative effect on employment by increasing capital/labor intensity. 2. Openness channel: a real appreciation does not favor exports and attract foreign direct investments, thereby a negative effect on employment. 3. Efficiency effect: a real appreciation exerts a pressure on efficiency improvement, thus a negative effect on employment. Using the panel data of the 29 Chinese provinces for the period from 1994 to 2002, the econometric results confirm the negative effects of the real appreciation of Renminbi on the manufacturing employment. The three channels are statistically significant, in which capital/labor intensity channel is more important.real exchange rate, employment, China