Labor market effects of exporter pricing behavior: Evidence from a developing economy

Despite an extensive literature on exporter pricing behaviour, the labour market consequences of exchange rate changes remain relatively under-studied. Using a product-level trade dataset from India, we document the case of incomplete exchange rate pass-through to traded goods prices, implying that adjustments could occur through both output and input markets. Thus, we estimate the effects of currency depreciation on product market power (markup), labour market power (markdown), and overall market power, using a plant-level data-set from India. We find that currency depreciation benefits workers in exporting firms by raising wages closer to competitive levels, with stronger effects for managerial than for non-managerial workers. Although exporters experience higher markups due to local currency depreciation, a substantial decline in markdowns leads to an overall reduction in combined market power. We address endogeneity concerns by identifying exogenous exchange rate variations along with historical industry averages as instrumental variable for plant’s export share. We further implement a shift-share design by interacting exchange rate with historical plant-level export exposure, using identified exchange rate shocks as an instrumental variable. These findings introduce a novel distributional dimension to the exchange rate pass-through literature.