Exchange rates and employment: critical issues

by NGANDU, S., 2008
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

The analysis of exchange rates and employment has received scant attention in development economics. This is surprising, since there appears to be a number of well-defined transmission channels through which exchange rates impact on employment. In South Africa this is particularly important given the rand’s higher volatility relative to other emerging economies. The main focus of this paper is to give an overview of the transmission channels through which exchange rates affect employment and to discuss the standard methodological approach to conceptualising the impact of exchange rates on employment. Given the sector-specific impact of exchange rates which are conditioned by industry characteristics, such as the degree of external orientation, there will always be winners and losers in the face of a currency shock. This means the full impact of exchange rates on employment can only be dealt with in an economy-wide framework. Results from a computable general equilibrium (CGE) model are presented to demonstrate that even in a country with unreliable employment data such as South Africa, one can still analyse exchange rate and employment issues.