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Exchange Rates and Wages in an Integrated World

Exchange Rates and Wages in an Integrated World by Antonio Spilimbergo
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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 0.1 after a year for countries with high barriers to external labor mobility, but about 0.4 in countries with low barriers to mobility. The results are robust to the inclusion of various controls, different measures of exchange rates, and concepts of labor market integration. These findings call for including labor mobility in macro models of external adjustment.
International Monetary Fund; March 2009
44 pages; ISBN 9781451990300
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Title: Exchange Rates and Wages in an Integrated World
Author: Antonio Spilimbergo; Prachi Mishra