Dollarization, Economic Growth, and Employment

Dollarization brought economic stability to Ecuador and higher economic growth. The labor market has not reacted accordingly and unemployment rates remain stubbornly around 10%. I use a simple econometric model of the labor market to disentangle the impact on employment of GDP growth, real wages, the cost of capital, and the real exchange rate. I found two opposing effects at work. On one hand, vigorous economic growth has led to a substantial expansion of labor demand (scale effect). On the other hand, changes in relative factor prices brought about by the dollarization process have played against employment creation (substitution effects): real minimum wages have increased while at the same time the real price of imported intermediate goods and the cost of capital have declined steadily. Together, these price changes indicate that labor is becoming a more expensive factor of production and, thus, signal for substituting labor away.