Labour market effects of currency appreciation : the case of Switzerland

Abstract:

Recent work on labour market effects of globalization has generated both academic and populist interests. However, this work has focussed exclusively on the manufacturing sector. Moreover, general equilibrium effects of globalization have received little attention.

This study contributes to filling both these gaps by examining the general equilibrium effects of external exposure on the labor market in Switzerland. We exploit exogenous exchange rate movements to identify trade-induced shocks across all sectors of the Swiss economy and transpose industry-level exposure to the municipal level, using detailed employment data on the entirety of Swiss firms. We find strong evidence for three channels of employment effects of currency appreciation - negative employment growth induced by increasing export uncompetitiveness and higher import competition, and positive employment growth induced by cheaper availability of foreign inputs. The combined average effect of the three channels on employment is found to be negative in our preferred results, with significant heterogeneity across municipalities.