The Impact of Exchange Rate Movements on Employment: The Economy-Wide Effect of a Rand Appreciation

by NGANDU, S., 2006
Research Report, Employment Growth & Development Initiative, Human Sciences Research Council

The volatility of the exchange rate is a particular concern for South Africa, since the country must dramatically expand sustainable employment while also raising value added in production. These objectives are not necessarily complementary in a minerals-exporting economy. This paper, part of an Human Sciences Research Council project on the relationship between exchange rates and employment, analyses the possible impact of an appreciation of the Rand on employment. Ngandu uses a computable general equilibrium model to identify the impact of an exchange rate appreciation (induced by a commodity price boom) on both aggregate employment and sector shifts. A rise in the world price of mineral exports improves South Africa’s terms of trade and leads to an appreciation of the currency, which partially counteracts the benefits of the price boom. It also negatively affects both exporting and import-substituting industries, while relative price changes benefit more domestically oriented activities, such as services Since this paper does not assume full employment, the expanding sectors absorb some of the displaced labour, while also creating new jobs. This expansion is sufficient to offset the decline in manufacturing output, so that both GDP and employment rise slightly. However, manufacturing profits fall, raising questions about the position of the economy after the commodity price boom. Will manufacturing sectors that have shrunk or remained stagnant during the boom recover sufficiently to replace the earnings lost when commodity prices fall?