The Effect of Real Exchange Rate Changes on Labour Productivity Growth

Abstract

We examine the effect of changes in international competitiveness on labour productivity growth through three channels: (i) export, (ii) import, and (iii) import competition. Using micro data from the Irish manufacturing over the period 1995-2002, we account for firms? heterogeneity in their exposure to international competitive pressure. Our econometric estimates indicate that a real exchange rate appreciation had a negative effect on labour productivity growth once a firm?s export exposure was greater than 14 per cent. When a firm?s import exposure exceeded 33 per cent, a real exchange rate appreciation had a positive effect on labour productivity. An increase in import competition due to a real exchange rate appreciation had no effect on a firm?s labour productivity growth.