Chapter 9. Effect of the Exchange Rate on Employment 263
9.6 Unemployment and the Industrial Transfer
Since 2008, the unemployment rate in some cities in the Pearl River Delta, such as Dongguan, has been rising rapidly. The media attribute the rising unemployment rate in the coastal areas to the exchange rate appreciation, which is one-sided. The rising unemploy- ment rate in coastal areas cannot be said to have no relation to the exchange rate appreciation. Alternatively, the change in industrial structure cannot be the main reason for it.
Changes in unemployment rate are related not only to the exchange rate adjustment but also to the industrial structure change, population growth, population structure, interest rate, and monetary policy, among others. In particular, during the process of rapid eco- nomic growth, the industrial structure change has a greater effect on the unemployment rate.
In the 1980s, when Taiwan, South Korea, Hong Kong, and Sin- gapore were in the economic takeoff stage, a large number of labor- intensive industries were transferred outside because of industrial structure upgrading which have led to rising unemployment rate.
During this period, changes in exchange rate were not consistent with the trend of unemployment rate.
Before 1980s, the clothing industry was the pillar industry of Hong Kong. Busy clothing factories proliferated in the streets. For a long time, Hong Kong implemented the currency board system, with its exchange rate pegged to the dollar, and the Hong Kong dollar exchange rate did not change. However, with the continuous
286 From Trade Surplus to the Dispute over the Exchange Rate
improvement of the wage level, the clothing industry lost its com- petitive advantage. A large number of clothing factories, which also housed the shops themselves, moved from Hong Kong to Shenzhen and the Pearl River Delta. Hong Kong’s leading industry rapidly changed from labor-intensive clothing and toy industries to finan- cial and service industries. Low-quality workers found entering the financial industry difficult, and the financial industry did not need that many workers. During the transition period in the 1980s, the transfer of Hong Kong factories inland caused the rapid rise of the unemployment rate. According to statistics, no relationship existed between the rising unemployment rate and the exchange rate in this period.
In the 1990s, a large number of labor-intensive enterprises in Taiwan moved to Guangdong and Fujian. Lee Teng-hui advocated the implementation of the “no haste, be patient” policy to main- tain the roots. In his opinion, the outflow of many enterprises leads to industry emptiness and the rising unemployment rate. In prac- tice, the economic law is inevitable. Taiwan enterprises continued to move to the mainland, which accelerated the industrial upgrading.
As a result, Taiwan’s unemployment rate dropped again after rising for a period. In the economic take-off stage, no correlation existed between the exchange rate changes and the unemployment rate in Taiwan.
We have made a quantitative analysis of the relationship between the exchange rate and the domestic unemployment rate in South Korea. The second-order integrated vector auto-regression model is adopted (second-order integrated, I (2)) because of the second-order integrated nature of the nominal variable or the price index (Juselius, 2005).13
log(unemployment)t=αt+β1tlog(ex)t+β2tlog (Balance)t+εt, where unemployment is the domestic unemployment rate, ex is the exchange rate, which is $1/KRW100,000, balance is the trade surplus, and εis the error.
13Juselius, K. (2005). Inflation, money growth, and I (2) analysis. Discussion paper, University of Copenhagen, http://www.econ.ku.dk.
Effect of the Exchange Rate on Employment 287
The regression result of β1t is −0.0097%, which does not pass the 10% significance test. Therefore, the assumption that the won appreciation leads to the rising unemployment rate fails.
Before the Asian financial crisis in 1997, the won continued to appreciate, but South Korea’s unemployment rate did not change significantly in the late 1980s (Fig. 9.3). Before the Asian financial crisis, a decrease in $/KRW by 1%, that is, 1% won appreciation, caused the unemployment rate in South Korea to rise by less than 0.01%. Thus, no significant relationship existed between the currency adjustment and the domestic unemployment rate. From 1989 to 1993, the correlation coefficient between the won exchange rate and the domestic unemployment rate was +0.065. When the won depreci- ated against the dollar, the domestic unemployment rate increased slightly, although the positive correlation between them was not sig- nificant.
South Korea suffered from a financial crisis in 1997, leading to a sharp depreciation of the won against the dollar by as high as 52%
and an increase in the domestic unemployment rate. The exchange rate depreciation is believed to increase domestic employment oppor- tunities and reduce the unemployment rate. This assumption does not apply to the period of financial crisis. In 1997 and 2000, the main reason for the soaring unemployment rate in South Korea was the Asian financial crisis and not the exchange rate changes. Simi- larly, South Korea’s unemployment rate dropped to below 5% after 1999 because it introduced the financial system reform, overcame the negative effect of the financial crisis, and restored the momen- tum of economic growth. The unemployment rate had no necessary relationship with the exchange rate adjustment.
After the Asian financial crisis broken in 1997, the won exchange rate showed no significant negative correlation with the domestic unemployment rate (−0.131), indicating that the won depreciation against the dollar caused the domestic unemployment rate to fall slightly.
Similar to Hong Kong, Taiwan, and Singapore, South Korea also achieved rapid industrial upgrading in the middle of 1990s. Before the Asian financial crisis in 1997, the proportions of the different
288 From Trade Surplus to the Dispute over the Exchange Rate
0 1 2 3 4 5 6 7 8 9
0 20 40 60 80 100 120 140 160
1986-01 1987-01 1988-01 1989-01 1990-01 1991-01 1992-01 1993-01 1994-01 1995-01 1996-01 1997-01 1998-01 1999-01 2000-01 2001-01 2002-01 2003-01 2004-01 2005-01 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01
USD/100 thousand KRW (left) The standard Unemployment rate
Figure 9.4: Correlation in the changes between the won exchange rate and the unemployment rate in South Korea.
Source: CEInet database.
science and technology products in the exports of manufacturing industries in South Korea were different. The exports of high-tech content products were close to those of low-tech content products.
In the 1990s, the South Korean manufacturing industry upgraded comprehensively. Since the start of the new century, the exports of high-tech and medium high-tech content products have increased significantly, whereas the exports of labor-intensive products have declined yearly.
During the industrial upgrading, the correlation between the won exchange rate and the domestic unemployment rate was not very significant. Seemingly, the exchange rate fluctuations did not affect the unemployment rate. Unlike Taiwan and Hong Kong, South Korea’s industrial upgrading did not show a significant effect on the unemployment rate. Therefore, a concrete analysis should be made to determine whether the exchange rate adjustment affects the unemployment rate instead of copying the economic development
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experience of developed countries in the past few decades or of the four Asian economic giants in the process of economic take-off.
Since 2008, many small and medium enterprises in Shenzhen and Dongguan have closed down, leading to a rising unemploy- ment rate. Some people think that this closing down is caused by the exchange rate appreciation. If this assumption is correct, then the question of why it does not affect other places remains. Many enterprises in Shenzhen and Dongguan have moved to the mid-west for development. Are these places not affected by the exchange rate appreciation?
From the experience of the four Asian economic giants, the rural surplus labor force is absorbed by the growing manufacturing and ser- vice industries, and the wage level rises gradually after the economic take-off; thus, the comparative advantage in labor-intensive products is gradually lost. A high unemployment rate is likely to occur in the process of industrial upgrading for a period of time. As long as the industrial upgrading is progressing, new industries will continue to provide employment opportunities to reduce the unemployment rate.
The unemployment rate fluctuations conform to the general law of economic development.
The four Asian economic giants held the comparative advan- tage in labor-intensive products for about 20 years. In the 1980s, Shenzhen and its surrounding areas were opened to the outside.
Thus a large number of labor-intensive industries were transferred from the four Asian economic giants to these places, promoting a rapid economic development in Shenzhen. Labor-intensive indus- tries have been developing in Shenzhen for more than 30 years.
With the average wage increase in Shenzhen and the increasing cost of living, labor-intensive industries are bound to move to other regions. Their destination depends on the market competition. These industries may be transferred to the central and western regions or overseas. Therefore, the rising unemployment rate in Shenzhen and Dongguan cannot be concluded to be unaffected by the exchange rate adjustment, although the main reason should be industrial upgrading.
290 From Trade Surplus to the Dispute over the Exchange Rate