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American Economic Journal: Macroeconomics: Vol. 3 No. 4 (October 2011)

AEJ: Macro Volume. 3, Issue 4 | Previous ArticleNext Article

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Exchange Rates and Wages in an Integrated World

Article Citation

Mishra, Prachi, and Antonio Spilimbergo. 2011. "Exchange Rates and Wages in an Integrated World." American Economic Journal: Macroeconomics, 3(4): 53-84.

DOI: 10.1257/mac.3.4.53

Abstract

We analyze how the pass-through from exchange rate to domestic wages depends on the degree of integration between domestic and foreign labor markets. Using data from 66 countries over the period 1981-2005, we find that the elasticity of domestic wages to real exchange rate is 0.15 after a year for countries with high barriers to external labor mobility, but about 0.40 in countries with low barriers to mobility. The result is robust to the inclusion of various controls, different measures of exchange rates, and definitions of labor market integration. These findings call for including labor mobility in macro models of external adjustment. (JEL F16, F31, J31)

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Authors

Mishra, Prachi (IMF)
Spilimbergo, Antonio (IMF and CReAm, U College London)

JEL Classifications

F16: Trade and Labor Market Interactions
F31: Foreign Exchange
J31: Wage Level and Structure; Wage Differentials

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