The Impact of Currency Appreciation & Depreciation on Unemployment

Instructor: David Juliao

David has a bachelor's degree in architecture, has done research in architecture, arts and design and has worked in the field for several years.

Can a weaker dollar create jobs in the United States? Does a stronger euro increase unemployment in Europe? In this lesson, learn about the effects of currency appreciation and depreciation on unemployment and explore ways to mitigate them.

Currency Appreciation and Depreciation

Imagine you work for the No-Name Company and your country's currency gets stronger. After a few weeks, you notice that imported clothes and other products cost less, and it becomes more affordable to travel abroad for your next vacation. It feels that things are going great. However, after a while, the company decides to leave the country and you lose your job. What happened?

The currency exchange rate compares the value of one currency to another, usually to the U.S. dollar. You need about 1.15 dollars to buy 1 euro, but just 1 dollar will get you about 60 Russian rubles.

If a dollar can buy more euros, the dollar appreciates. If it can buy less, it depreciates.
Dollars and euros

Every day, the rate moves slightly because of financial movements, market fluctuations, and geopolitical events. These small changes have no major consequences. However, at times, a currency rises or falls constantly for a period. This is known as appreciation if the value increases compared to other currencies, so it can buy more foreign money; or depreciation, if the value of a currency falls, so it can buy less.

How Do Exchange Rates Affect Unemployment?

Unemployment is the number of people capable of working but currently without a job. Most countries measure unemployment as a percentage of the active population. A 6% unemployment rate means that 6 out of 100 people in working age (usually between 15 to 64 years old) don't have a job.

The currency exchange rate has an indirect impact on unemployment because it affects the competitiveness of local firms and the costs of imported goods and raw materials. Changes in the currency exchange rate might cause job losses or grow the demand for employees.

Effects of Currency Appreciation

A stronger currency can buy more imported goods, so it might be more profitable to import than to produce locally. Some local companies fail to compete against the lower price of imports and go out of business, thus causing unemployment.

Furthermore, local goods become more expensive for international buyers, so the demand for exports falls. This forces local exporters to reduce costs, and one way to do that is by cutting jobs.

Eventually, other local firms might see the opportunity of lowering costs and increasing profit by operating somewhere else. With a strong currency, local labor becomes expensive and it could be more profitable to produce abroad than to do it locally.

A stronger currency makes it harder for exporters, so they might cut jobs in order to lower costs.
Climbing

When companies leave, unemployment rises. This is what happened with the No-Name Company, so currency appreciation tends to cause unemployment. The industries that used to be in Detroit are an example. Many steel companies and car manufacturers found it more profitable to import or pay foreign labor, so they left.

In the long term, some companies manage to become more competitive and the economy tends to migrate to other more profitable sectors, like technology.

Measures to Counteract the Effects on Unemployment

Some countries might increase taxes on imports to reduce their consumption and maintain the demand for local goods.

Governments often offer subsidies to local producers, especially farmers and small industries, in hopes that they can remain competitive. This helps to prevent unemployment from rising. Several European farmers receive subsidies to remain in business because many can't compete with international prices. Local firms might also receive tax incentives, encouraging them not to leave the country and continue to provide jobs.

These measures are usually for a limited time so that companies can adapt and make changes for becoming competitive again.

Effects of Currency Depreciation

When a currency depreciates, imports become more expensive, so local consumers tend to buy more local products. Exports become more competitive internationally because they now cost less, so the demand for local products grows. As a result, local firms try to increase production, so they often hire more personnel.

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