The Analysis About The Relationship Between RMB Real Exchange Rate And Employment In China

With the globalization of China, exchange rate market is also becoming more and more open, so the appreciation of RMB is very likely to happen. We also know that relatively full employment is the base of stability and prosperity of a country. So to analyze the relationship between RMB fluctuations and employment in China is of great importance.Firstly of all, this paper introduces the mechanisms through which the fluctuations of RMB exchange rate impact the conditions of employment. Exchange rate can have an influence on employment from the views of supply and demand. From demand aspect, exchange rate impacts employment through three mechanisms, which are foreign trade, the inner adjustments of employment structures and foreign direct investment. From the aspect of supply, exchange rate fluctuations impact employment through two mechanisms, which are income effect and substitution effect.Then this paper introduces the changes of China’s exchange rate regime and describes the long trends of the exchange rate of RMB and employment. From the descriptions, this paper finds that in the recent30years, the exchange rate of RMB with respect to USD tends to firstly depreciate in a high pace and then appreciate slowly and at last appreciate very fast in the very recent years and even in the near future, and with the globalization of our foreign exchange market, the value of RMB will arrive the equilibrium gradually. On the other hand, for employment, the employment of agricultural part has decreased, and that of the second industry has increased gradually, and that of the third industry has increased sharply.Next, this paper demonstrates an empirical model from the profit maximization theory. Based on the empirical model and data of the real effective exchange rate of RMB, China’s GDP, real interest rate, total labor supply and China’s employment from1983-2011, in this paper, I use the ADF test, Co-integration test and Granger causality test to test the relationship between real effective exchange rate, GDP, etc. and China’s employment of three industries and the total employment. The empirical results show that there exist co-integration relationships between real effective exchange rate of RMB, China’s GDP, real interest rate, total labor supply and China’s employment (primary industry, secondary industry, tertiary industry and total employment respectively). I also find that real effective exchange rate of RMB does Granger cause China’s primary industry, secondary industry and total employment, and in long equilibrium, when the real effective exchange rate of RMB increase by1%, the employment of the primary industry will increase by0.320%, the employment of the secondary industry will decrease by0.832%, the employment of the tertiary industry will decrease by0.354%, and the employment of the total employment will decrease by0.281%. The results also indicate that other variables except real effective exchange rate also have some long-term positive or negative effects on employment but the effects are not as significant as real effective exchange rate of RMB.