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Skill-Biased Technological Change and the Real Exchange Rate

Matthias Gubler () and Christoph Sax

No 2014-09, Working Papers from Swiss National Bank

Abstract: 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.

Keywords: Real Exchange Rate; Balassa-Samuelson Hypothesis; Skill-Biased Technological Change; General Equilibrium (search for similar items in EconPapers)
JEL-codes: F16 F31 F41 J24 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014
New Economics Papers: this item is included in nep-opm
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Working Paper: Skill-Biased Technological Change and the Real Exchange Rate (2012) Downloads
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