Exchange rate fluctuations and labour market adjustments in Canadian manufacturing industries

We estimate the link between exchange rate fluctuations and the labour input of Canadian manufacturing industries. The analysis is based on a dynamic model of labour demand and the econometric strategy employs a panel two‐step approach for cointegrating regressions. Our data are drawn from a panel of 20 manufacturing industries from the KLEMS database and cover a long sample period that includes all cycles of appreciation and depreciation of the Canadian dollar over the last 50 years. Our results indicate that exchange rate fluctuations have significant long‐term effects on the labour input of Canada's manufacturing industries, especially for trade‐oriented industries, but that these long‐term impacts materialize very gradually following shocks.