Real Exchange Rates and Skills

While most of the literature on the determination of real exchange rates is focused on the role of standard macroeconomic variables, there exists however a few papers that are more concerned by the impact of factors which are usually considered to play a key role in the process of economic development, like demography or inequality. In the present paper, we extend this small branch of the literature by exploring the relationship between labor skills and real exchange rates over the long-run. According to several theoretical arguments, the real exchange rate of countries experiencing an increase in the ratio between skilled and unskilled workers should appreciate. That is what we actually find empirically using panel regressions covering 22 countries over the period 1950-2010. The impact of skills on real exchange rates is robust to the inclusion of several control variables, like those used in traditional analyses of real exchange rates. The real exchange rate therefore appears as one channel through which increases in skills can alter economic growth. What we call a "skill disease" effect offers a new partial explanation to the weak link between human capital and GDP growth that is often found by the empirical literature.