On the relation between currency depreciation and wages

Abstract

Devaluation is said to redistribute income from the poor, who have a high Marginal Propensity to Consume (MPC) to the rich, who have a low MPC. Assuming the high MPC group to be unskilled labour and the low MPC group to be skilled labour, we investigate the impact of currency depreciation on skilled and unskilled wage rates by drawing data from 18 countries. While in most countries we found short-run effects, the long-run effects of devaluation on both wage rates were limited to a few countries. Indeed in these countries, devaluation raised the skilled labour wages and reduced unskilled labour wages in the long run as theory dictates.

Notes

¹ For a review article on the relation between the trade balance and the exchange rate see Bahmani-Oskooee and Ratha (2004).

² It should be mentioned that almost every study has concentrated on testing the well-known Kuznets' inverted-U hypothesis with mixed results. Some examples are: Ahluwalia (1976), Fields (1980), Papanek and Kyn (1986), Ram (1991), Anand and Kanbur (1993), Eusufzai (1992), Campano and Salvatore (1988) and Deininger and Squire (1996).

³ Note that in the case of Greece while the F-statistic is significant, the ECM _{t −1} actually carries a significantly positive coefficient, implying a disequilibrium model.

⁴ Due to lack of wage data, the period of study had to be restricted to 1969–1996 for Botswana, to 1970–1999 for Greece and to 1969–1997 for Kenya. For the list of all countries, see Table 1.