Exchange Rate, External Orientation of Firms and Wage Adjustment

What is it about?

We estimate the effect of exchange rate movements on firm-level wages, using a rep- resentative panel of Italian manufacturing firms. We show that the direction and size of wage adjustment is shaped by the international exposure of each firm on both the sale and cost side of the balance sheet, similar to the response of employment docu- mented in (Nucci and Pozzolo, Journal of International Economics 2010; 82 : 112.). Through the revenue side, wages tend to rise after a currency depreciation and the effect is more pronounced the higher is the firm’s exposure to sales from exports. Through the expenditure side, a depreciation induces a cut in the firm’s wages, and the effect is larger the higher is the incidence of imported inputs in total production costs. For a given degree of external orientation, both these effects are larger for firms with a lower market power. Moreover, we document that the effect of exchange rates on wages is shaped by the extent of sectoral import penetration in the domestic market.

Featured Image