Risheng Mao and John Whalley
NBER Working Paper No. 17565
November 2011
JEL No. F16,F31,J21,J31

ABSTRACT

This paper uses a firm level multi-industry data set covering 456 Chinese manufacturing sectors to
assess the implications of Renminbi (RMB) real exchange rate appreciation for adjustments in employment
and wage rates. We stress differences in both industry and firm characteristics within sectors. Our
empirical results show that modest (and also larger) RMB real exchange rate appreciation would likely
have pronounced effects on both net employment and wage rates. A 10% RMB appreciation would
likely cause a net employment decline in Chinese manufacturing industries of between 4.1% and 5.3%,
and a wage rate drop of 4% after controlling for other factors. Real exchange rate change effects by
industry on net employment and wage rates vary significantly with the ownership characteristics of
firms within industries. Employment and wage rates for private enterprises are less responsive to RMB
real exchange rate fluctuations than is true for state owned enterprises (SOEs) and foreign invested
enterprises (FIEs). This finding is opposite to the widely held belief that the labor market behavior
of Chinese SOEs shows stronger labor market rigidities than for private firms. Impacts of exchange
rate movements emerge as systematically related to export openness, overall import penetration and
profit margins of individual manufacturing industries.