The Exchange Rate, Labor Market Regulation And Labour Market Adjustment

Economy globalizaition intensifies riskes of external shocks of open economies,in2008, the financial crisis transfers to others economies through various channelsrapidly. Exchange rate volitily is one of the most important shocks, whocarriesimportant impacts on global labour market. The impacts are related to exchange ratesystem, however, the capacity of labour market responding to exchange rate shockand labour market adjustment play important roles which may be closely related tolabour market system or institution. This dissertation believes labour market systemor institution is an important factor determining the labour market response toexchange rate shocks and equilibrium after adjustment.Empirical studies have shown that exchange rate shocks together with othershocks results in the steady decline in employment rate of developed countries andthe persistly increase in unemployment rate of unskill labours. The manufateringsectors are the case. In addition, the flexibility of exchange rate system itself isgradually increasing and on the road to floating system, which therefore inevitableinfluences the condition of international trade and exerts volatility effect onequilibrium variables such as employment and wage and market structure as forexport pattern depending on cheap and abundant labour. On the same time, activelabour market policies play important role in advancing labour market system, labourmarket system of Chinese mainly carries out active labour market policies andexperiences adjustment from focuses on “absolutely employment safety” to“comprehensive consideration of the flexibility of labour market, employmentsafety and the banlace of work safety”. Policies and regulations related toemployment safety put cost constraints on behaviors of hiring and firing, incurredadditional system costconstraint on employment adjustment.The main goal of our paper is to explore the mechanism of impact of exchangerate on employment, wage and skill premium, and then use manufacturing sectorsdata to conduct the empirical analysis of the impact of exchange rage and labour adjustment cost on employment and wage under the labour adjustment cost.The whole paper includes six chapters. In chapter1, the introduction brieflydiscusses the backgrounds, main concepts, the research idea, structure, and maininnovation. In chapter2, we document the literature involved employment andexchange rate, and present theoretically the mechanism of impact of exchange rateshocks on employment and the relation between this impact and labour marketregulations from three strands of the literature on international trade. In chapter3, weuse china macroeconomy data to conduct a detailed analysis of the current situationof exchange rate, labour market institution, wage and employment, and then study theabove factor of OECD countries which try to judge the gap between china labourmarket institution related to employment protection and the mature flex-safe labourmarket pattern. In chapter4we analysis the impact of exchange rate and labourmarket institution on employment and wage theoretically, and the main conclusion islabour market institution in form of labour adjustment cost decreases the elasticity ofemployment to exchange rate, exposure to world economy conversely increase theelasticity of employment to exchange rate, an increase in exchange rate persistenceincreases the reaction of labour demand to exchange rate movements as well as anincrease in labour productivity lowing the elasticity of employment to exchange rate.In chapter5, we use china manufacturing sector data for1998-2009and analysis theimpact of exchange rate and labour market insititution on employment, wage and skillpremium,. The chapter6presents the conclusion and policies complication.Through empirical and theretical analysis, we get the conclusion as follows: firstly,employment and wage are positively correlated to effective exchange rate, the indexof labour marketlization is proxied of labour adjustment cost and promotesemployment an wage in manufacturing sectors. Secondly, devaluation of effectiveexchange rate increases employment and employment creation rate through exportchannel of domestic firms, decreases wage level, results in decline in employmentand employment destroy rate through import channel, and increases employment,employment reallocation rate, employment creation rate and employment destroy ratethrough effective channel. Of all determints of the elasticity of employment toeffective exchange rate, the ratio of capital to labour plays a small role, the average markup is the second most important determinant, and the structure of labourcontributes to the elasticity of employment to effective exchange rate mostly. Thirdly,labour adjustment cost decreases the elasticity of employment to effective exchangerate and the elasticity of employment reallocation to effective exchange rate. Thegreater volatility of effective exchange rate leads to large negative impact onemployment. Labour adjustment cost exerts negative effect on the elasticity ofemployment to effective exchange rate through job flow channel. We also adoptDifferences–in-differences method to show labour adjustment cost has a great impacton the elasticity of employment to effective exchange rate of sectors with lowerlabour productivity than than with higher labour productivity. In one word, labourmarket cost influences the employment adjustment in case of exchange rate shocks. Itnot only reduces employment and constraint job flow, but also affects the elasticity ofemployment to effective exchange rate through job flow. Fourthly, labour adjustmentcost has negative impact on skill premium, between skill workers and unskill workers,and the corresponding labour market regulation put legal constraint on skill workers.The effective exchange rate widens skill premium,.Thecontributions on theoretical and empirical studies embody such aspects:firstly, on theoretical analysis side, I extend the assumptions of smoothy labourmarket in the previous studies, embody the adjustment cost incurred by labour marketinstitution in the theoretical analysis, and design my theoretical model combined Newtrade theory and labour market institution or system to discuss the theoreticalmechanism of exchange rate and adjustment cost of labour market exerting effect onemployment and wage.The theoretical model shows adjustment cost of labour marketdecreases elasticity of employment to exchange rate and narrow the fluctuation ofemployment and wage reacting to exchange rate volatility, which makes employmentand wage fluctuate gently. My theoretical study advances previous theoreticalframework and therefore laid a sound foundation for subsequent empirical analysis.Secondly, on the empirical analysis side, under the guidance of the presenttheory, I use differences-in-differences method and dynamic panel to makequantitative analysis of the impact of real effective exchange rate and labour marketinstitution on employment and wage at industry level. The empirical analysis conducts from two aspects: employment and wage(skill premium) and focuses on theeffect of adjustment cost incurred by labour market institution on employmentadjustment and wage adjustment reacting to exchange rate volatility and makes acompatative analysis of the channels and impact of real effective exchange rateaffecting employment and wage under the assumption of smoothy labour market. Myempirical study advances and enriches the existing empirical literature in this fieldfrom the perspective side, theoretical basis side, estimation method side andconclusions side.Thirdly, I construct indicators of labour market flexibility specified by Chinaindustries as well as indicators of the real effective exchange rate specified by Chinaindustries. I make some constributions to indicator system and further my study, aswell as provide a useful reference for others scholars in this filed.