The impact of exchange rate movements on employment: the economy-wide effect of a rand appreciation

There has been some debate on the impact of exchange rate volatility and levels in South Africa. This is a particular concern as South Africa needs to dramatically expand sustainable employment, and at the same time, raise value-added in its goods and services production. These are not necessarily complementary objectives in the context of a minerals exporting economy. Surprisingly little has been written about the relationship between exchange rates and employment. This paper is one of eight being produced as part of an HSRC project to review this relationship in depth. In this paper, we analyse the possible impact of an appreciation of the rand on employment. The intention is to identify the impact on both aggregate employment as well as sector shifts. This is done by using a computable general equilibrium model, with the appreciation induced by a commodity price boom. A rise in the world price of mineral exports improves South Africa's terms of trade and leads to an appreciation. This partially counteracts the benefits of the price boom. It also impacts negatively on both exporting and import-substituting industries, largely manufacturing sectors that have to compete internationally. At the same time, relative price changes benefit more domestic oriented activities, largely services. Unlike the standard small open economy model, this paper does not assume full employment. The expanding sectors thus not only absorb some of the labour displaced from declining sectors, but also create jobs for previously unemployed labour. This expansion is sufficient to offset the decline in manufacturing output, so that GDP experiences a slight increase, as does employment. However, profits fall in manufacturing, raising questions about what the position of the economy will be when the commodity price boom is over. Will manufacturing sectors that have shrunk or remained stagnant during the boom be able to recover sufficiently to replace the earnings lost when commodity prices fall?