Journal article Open Access

Employment response to real exchange rate movements: Evidence from Hungarian exporting firms

Koren, Miklós

This paper estimates the labor demand response of Hungarian exporting firms to real exchange rate movements. The use of firm level export–import data enables the separation of two channels through which the exchange rate affects labor demand. First, a real depreciation raises the forint-equivalent price of foreign competitors, thereby boosting demand for the firm’s export and, hence, the firm’s demand for labor. Second, by raising the cost of imported inputs, a depreciation has an adverse effect on employment through the cost channel. A higher marginal cost induces a decrease in production and thus shrinks labor demand. Since firms with higher export share tend to import more, this latter negative effect might offset the former positive one. The cost effect may be dampened if labor and imported inputs are substitutes.

The paper shows that the relative importance of the demand and cost effects is industry specific. The short-run exchange rate and employment elasticity stemming from the demand effect is around 0.04. This channel is most pronounced in the case of the Food and tobacco industry. Machinery, on the other hand, exhibits a cost effect of roughly -0.04. Surprisingly, there is no evidence that export share affects exchange rate exposure.

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