On the relation between currency depreciation and wages

Abstract

Devaluation is said to redistribute income from the poor, who have a high Marginal Propensity to Consume (MPC) to the rich, who have a low MPC. Assuming the high MPC group to be unskilled labour and the low MPC group to be skilled labour, we investigate the impact of currency depreciation on skilled and unskilled wage rates by drawing data from 18 countries. While in most countries we found short-run effects, the long-run effects of devaluation on both wage rates were limited to a few countries. Indeed in these countries, devaluation raised the skilled labour wages and reduced unskilled labour wages in the long run as theory dictates.