The Impact Of Wage And Exchange Rate On Production Structure: A Study Of High-growth Economy

As the basic price indices, exchange rate and wage play a significant role in theresource allocation and have a great effect on the production structure. Such adiscipline is quite important to China whose main duty is to change the economicstructure for fast and sustained economic development. By far, the academiccommunity hasn’t reached a consensus on the proper way to change the China’seconomic structure. Some scholars think the appreciation of the exchange rate canrebalance the economic structure; some believe the key point to solve the problem ofChina’s economic structure is to correct the factor market’s distortions, so as to makefull use of factors’ price, especially the role of wage; others suggest to solve thestructure problems by the gradual appreciation of RMB and the progressive increase inwage. McKinnon and some scholars hold the point that the exchange rate appreciationand the wage growth can substitute for one another in the long run, but unfortunately,they don’t give any rigorous theoretical analyses and empirical tests.Inspired by McKinnon and other scholars, this paper intends to answer thefollowing questions: Whether changes in exchange rate and changes in wage couldsubstitute for each other in high growth and high export economies or not? Which kindof effect do the exchange rate and the wage have on the production structure? Ifchanges in exchange rate and changes in wage could substitute for each other, whichindex is better in terms of structure change? The answer to these questions can providean objective reference to the reform of the China’s exchange rate regime, theimprovement of income distribution, the adjustment of economic structure and thefurther development of China.This paper is divided into six chapters to answer these questions.Chapter I, in order to have a rigorous and targeted analysis, we summarize the literatures which topic is about the relationship between changes in exchange rate andwage changes or about exchange rate’s and wage’s impacts on production structure.Chapter II, we explain the reasons for selecting those sample countries andintroduced the stylized facts of changes in production structure, exchange rate andwage in these economies. Based on the growth report provided by the World Bank, weselect China, Japan, South Korea, China Taiwan, Thailand and Malaysia as samplecountries. During the sample period (since the1970s), all the sample countries haveundergone some changes in production structure, exchange rate and wage. Thesestylized facts provided a basis for further analysis.Chapter III, we use basic statistical analysis to explore the relationship betweenchanges in exchange rate and changes in wage. The conclusion is that under the fixedexchange rate regime, wage can adjust with the labor productivity which means thesample countries’ wages have flexibility; under the floating exchange rate regime,exchange rate changes and wage changes can substitute for one another.Chapter IV, this section is the theoretical analysis of this paper. Through theextension of the Scandinavian model and the framework of Obstfeld and Rogff (2002),we use a static general equilibrium analysis to get the conclusion that whether the laborflow or not, wage growth can promote the optimization of production structure, whilethe exchange rate adjustment has uncertainty effect on production structure. Comparedwith adjustments in exchange rate, wage growth can raise the national welfare more.Chapter V is the part of econometric analysis. By using panel FGLS, modelspecification test and robustness test, etc., we show that the empirical results areconsistent with the theoretical analysis. The nominal wage growth can lead resourcesto high-productivity sectors in both inter-industry level and intra-industry level. Theeffect of nominal exchange rate to production structure is uncertain and not robust. Inmost cases, the nominal exchange rate plays no role on structure change.Chapter VI, we give the conclusions and suggestions in this chapter. In order tohave a sustainable development in China, we should promote the increase of wage,eliminate the distortion of exchange rate, improve the lag development of service industry and change the pattern of processing trade.Our work sheds new lights on the research of China’ s structure change followingthe two reasons: On one hand, we discuss the impact of exchange rate and wage onproduction structure under the general equilibrium context by extending theScandinavian model for the first time. On the other hand, unlike the current methodsused to analyze such a topic, we try to apply panel FGLS and some other newempirical methods to analyze this issue.