The Influences From REER To Unemployment Rate

With the unceasingly deepening of economical globalization, China is faced with a more and more complicated domestic and oversea environment, the growing pressure on appreciation of the RMB and the grim domestic job market are two burning problem need to be solved. This study divides enterprises into four groups according to the openness of product market and production elements market, construct the labor demand function of a small open economy. Use this function to analyze the determinants of unemployment and the pass-though effects of exchange rate movements on job market. With a comparative analysis between a small economy who can’t control the price and a big economy who can make it,this paper find that the influence from exchange rate on job market will be very limited. The determinants of unemployment rate, the openness way, the factor intensity way and the capital expansion way that exchange rate can work though on job market are all evaluated using a 177 countries panel dataset.This paper yields some result:First, Wage, GDP and Productivity have a significant effect on unemployment rate, the higher the wage is the higher the unemployment rate will be, improve the productivity of workers and keep on increasing GDP can make the rate lower; As the Phillips curve analyzed, inflation show a negative effect on unemployment. Second, real exchange rate and openness have a positive effect on unemployment rate, attracting more FDI and increasing industrial products can help lower the rate. Third, high opening degree can amplify the influence of exchange rate movements. The job market of a country which mainly exports labor intensity products will be influenced by exchange rate more easily. As a part of capital expansion, FDI has a limited connection with exchange rate. It means FDI is not a significant way for exchange rate to work though. Theoretically, the effect of capital expansion comes from two sides, the replacement effect and the complementary effect.Combined with the fact of china, some suggestions are given according to the results from theoretical analysis and quantitative inspection, and the direction of the theory is discussed briefly in the end of this paper.