Low-skilled workers can profit from a fall in the exchange rate, according to research by Boris Kaiser and Michael Siegenthaler, published in the May 2016 issue of the Economic Journal. Conversely, their study shows that a rise in the exchange rate mainly hurts the employment of low-skilled workers while it can be beneficial for the employment of high-skilled workers.

The researchers investigate the impacts of movements in the real exchange rate on employment in the Swiss manufacturing sector, analysing data collected by the KOF Swiss Economic Institute for the period from 1998 to 2012. They find that the impact of a real appreciation of the Swiss franc on staff numbers varies strongly from company to company. Not surprisingly, companies that generate the majority of their turnover abroad shed the highest number of jobs. But while exchange rate appreciations do generally result in job losses, some companies actually create new jobs.

The authors focus on firms in Switzerland because the Swiss franc traditionally acts as a safe haven currency. Thus, the country''s exchange rate sometimes changes substantially within a short period of time, affecting the competitiveness of Switzerland''s many exporting firms. In January 2015, for example, the real exchange rate appreciated more than 10% within just one month after the central bank lifted its previously established ceiling of the Swiss franc against the euro.

The winners of exchange rate appreciations are firms that purchase the majority of their inputs abroad and do not export much: while an appreciation has only a limited impact on their sales, it automatically lowers the costs of their imported inputs. The impact of exchange rates on firms'' level of employment is relatively modest due to this ''natural hedging'' of firms against exchange rate movements through the cost side – a fact that is known from previous research.

But the new study shows that this low overall responsiveness of employment to exchange rates hides the fact that firms change the skill structure of their employment. When facing an exchange rate appreciation – and therefore losing out in terms of cost competitiveness – employees with low to medium qualifications suffer more than those with good qualifications.

In fact, the researchers estimate that an exchange rate appreciation tends to wipe out low- and medium-qualified jobs in Swiss manufacturing firms while creating new jobs for highly qualified employees. The reverse is true in the case of a depreciation. The results show that there can be winners and losers of exchange rate movements even within a single company.

The authors argue that this is mainly due to the fact that exchange rate movements influence the cost of foreign inputs – foreign workers or capital imported from abroad. If their home currency appreciates, firms have an incentive to use more foreign inputs and workers because these inputs become relatively cheaper.

But such foreign inputs mainly substitute for low-skilled jobs and can actually complement work done by high-skilled workers. For example, it is tasks commonly done by low- and medium-skilled workers that are usually outsourced. Similarly, capital (such as machines) is usually complementary to high-skilled workers while substituting for low-skilled workers. Adjustments in the input mix caused by exchange rates thus have a much stronger effect on the jobs of employees with low or medium qualifications than on the highly qualified.

Other mechanisms could reinforce the ''skill-biased'' effects of exchange rate fluctuations. In particular, firms that are facing higher price competition (because they have lost out in terms of price competitiveness due to an appreciation) are forced to raise their productivity. This could involve hiring more skilled workers.

''The Skill-biased Effects of Exchange Rate Fluctuations'' by Boris Kaiser and Michael Siegenthaler is published in the May 2016 issue of the Economic Journal. Boris Kaiser is at the University of Bern. Michael Siegenthaler is at KOF Swiss Economic Institute.