Exchange-rate stability as a trade union's discipline device

Purpose The paper deals with a classical topic in international macroeconomics and finance: to what extent exchange-rate policies affect domestic macroeconomic outcomes. In particular, it studies whether a fixed exchange-rate policy is likely to impoverish resident wage earners in the private sector of a unionized economy, as suggested by earlier research on the labor-market effects of exchange-rate stability. Design/methodology/approach Worker-level data from the European Community Household Panel are used to provide novel quasi-experimental evidence on the labor-market effects of exchange-rate stability as well as to perform a robustness analysis of earlier research on the topic, including a falsification exercise. Findings Earlier research seems robust to confounding factors as well as to endogeneity and anticipation issues. Yet, a deeper statistical analysis reveals that the treatment effect of exchange-rate stability on wages is driven by both year and quantile parameter heterogeneity. Research limitations/implications Exchange-rate stability affects both the location and the shape of the conditional wage distribution in the private sector of a unionized economy. Practical implications A fixed exchange-rate policy reduces the mean of the conditional wage distribution in the private sector of a unionized economy in the years following the contract renewals that occur under the policy. Social implications A fixed exchange-rate policy increases the dispersion of the conditional wage distribution in the private sector of a unionized economy as workers located at lower quantiles are more penalized than those located at upper quantiles. Originality/value To the best of our knowledge, this paper is the first that performs a falsification exercise with worker-level data in the field of international macroeconomics and finance. It is also the first paper in the field that uses worker-level data to uncover year and quantile parameter heterogeneity in the treatment effect of exchange-rate stability on wages.