Skill-Biased Technological Change and the Real Exchange Rate

December 10, 2014
Issue 2014-09

Summary

We sketch a model that shows how skill-biased technological change may reverse the classic Balassa-Samuelson effect, leading to a negative relationship between productivity in the tradable sector and the real exchange rate. In a small open economy, export goods are produced with high-skilled labor, in conjunction with capital and low-skilled labor, and are traded for imported consumption goods. Non-tradable services are produced with low-skilled labor only. A rise in the productivity of capital has two effects: (1) It may reduce the demand for labor in the tradable sector if the substitutability of low-skilled labor and capital in the tradable sector is high; and (2) it increases the demand for non-tradables and associated labor input. Overall demand for low-skilled labor declines if the labor force of the tradable sector is large relative to the labor force of the non-tradable sector. This leads to lower wages and thus to lower prices and real exchange rate depreciation.

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Issue:
09
Pages:
37
JEL classification:
F16, F31, F41, J24
Keywords:
Real Exchange Rate, Balassa-Samuelson Hypothesis, Skill-Biased Technological Change, General Equilibrium
Year:
2014

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Author(s)

  • Dr. Matthias Gubler

  • Christoph Sax

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