 Do labor market distortions cause overvaluation and rigidity of the real exchange rate?No 485, Policy Research Working Paper Series from The World Bank Abstract: The main objective of this paper was to measure the importance of labor market distortions in explaining the marked tendency to real exchange rate overvaluation and the relatively low effectiveness of devaluation in Latin America. The main finding is that distortions in the formal labor market are a major factor explaining wage rigidity and the diminished responsiveness of the real exchange rate to devaluation. The implication is that greater liberalization of the labor market can substantially improve the efficacy of exchange rate policies in preventing overvaluation of the real exchange rate. Another important finding is that changes in the minimum wage have substantially broader effects on the wage structure of the economy than previously thought. This, in turn, implies that continuous increases in the minimum wage are an important factor underlying the observed tendencies to overvaluation of the exchange rate in Latin America. Keywords: Environmental Economics&Policies; Macroeconomic Management; Economic Stabilization; Labor Markets; Economic Theory&Research (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:485 Access Statistics for this paper More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC. |
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