The paper entitled “Exchange Rate Movement, Domestic Production Chains, and the Employment of Non-trading Firms”, which was jointly written by our school’s Associate Professor Wang Yaqi and Assistant Professor Liu Yalin of CUFE School of International Trade and Economics, has been published in the Journal of World Economy in November 2020. Using Chinese manufacturing firm-level data, this paper explores how exchange rate shocks affect employment in non-trading firms across domestic production chains.

According to the theoretical formulation, there are three main transmission channels through which exchange rate movements affect non-trading firms’ employment: the import competition channel and upstream and downstream transmission channels from the perspective of industrial linkages. Through empirical analysis, employment elasticity with respect to exchange rate movement is found to be greater through industrial linkages than through import competition channels. The baseline results strongly support the theory and remain valid after a series of robustness tests. It is also noted that exchange rate shocks have a greater effect on unskilled and female labor, and the exchange rate elasticity of wages is significant. When RMB appreciates, more workers move from higher markup firms to lower-markup firms, and dispersions in employment and markup are greater, leading to a resource reallocation distortion.

The paper contributes in the following respects: First, the theoretical model of the paper, excluding the effect of exchange rate movement on the size of employment of non-trading firms, acts as a key supplement to the assessment and study of the impact of exchange rate policies. Campa and Goldberg (2001), Nucci and Pozzollo (2010), Dai Mi et al. (2013), and Tie Ying and Liu Qiren (2018) focus on the effect of exchange rate changes on the employment of firms participating in trade. However, the assessment of the effect of exchange rate changes on the labor force decisions of manufacturing firms cannot ignore non-trading firms. Our statistics on imports and exports of industrial enterprises above a designated size from 2000 to 2007 find that, on average, about 92% of manufacturing firms did not export anything, about 94% did not import anything, and about 88% neither exported nor imported. This suggests that studying the impact of exchange rate movement on the labor force of non-trading firms is important to assess the impact of exchange rate changes on the labor demand of manufacturing firms in a holistic manner. Second, we include the upstream and downstream relationships of domestic inputs and outputs in the analysis of the impact transmission mechanism of exchange rate movement. Compared with the past literature that highlighted the import competition channels, we find that the exchange rate has a more statistically and economically significant impact on the hiring decisions of non-trading firms through the upstream and downstream relationships at the domestic industry level. That is, the past literature only considers the direct impact of exchange rate movement on employment, while ignoring the potential indirect effects. Third, the paper further analyzes the effects of exchange rate changes on the resource allocation, wages and other welfare of non-trading firms at the industry level in combination with the theoretical analytical framework and empirical estimation results. Most of the previous studies have focused on the analysis of the impact of exchange rate changes on headcount and wages of firms, and dealt less with the resulting impact on resource allocation efficiency and related welfare. The paper fills the gap in this area of research by focusing not only on the impact of exchange rate movement on the average statistics of firms, but also on the impact of exchange rate movement on the distribution of relevant variables within the industry.