The Dilemma of One Currency Area : the Interactive Effects of Currency Overvaluation and Labor Market Rigidity on Export

We characterize the dilemma of one currency area: the common currency’s value is overvalued for regions with poor fundamentals, which hampers export. With labour market rigidity, they cannot reduce labour costs to restore its growth, leading to further reduction of exports. Using Chinese firm-level data, we show that RMB overvaluation restricts firms’ exports. The effect is more profound for exporters located in cities with higher minimum wage growth rates and shows up in both intensive and extensive margins of Chinese exporters. We further observe that impact differs in terms of the regions that firms are located, years of implementing minimum wage standards, and firm characteristics, including import status, ownership, and firm performance. Our findings are generally robust to alternative measures of variables, subsamples, correction for sample selection bias, and endogeneity issues