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New dawn fades: trade, labour and the Brexit exchange rate depreciation

Author

Listed:
  • Vieira Marques Da Costa, Rui
  • Dhingra, Swati
  • Machin, Stephen

Abstract

This paper studies consequences of the large exchange rate depreciation occurring when the UK electorate unexpectedly voted to leave the European Union. Sterling plummeted, recording the biggest one-day depreciation of any of the world's four major currencies since Bretton Woods. The prospect of Brexit happening generated sizable differences in how much sterling depreciated against different currencies. Coupled with pre-referendum cross-country trade patterns, this generated variations in exchange rates facing businesses in different industries. The paper offers evidence of a cost shock from the prices of intermediate imports rising by more in higher depreciation industries, but with no revenue offset from exports. Workers were impacted by these increased cost pressures, not in terms of job loss but through relative real wage declines in higher depreciation, larger cost shock industries. This resulted in an aggregate fall in real wage growth of 3 to 3.6% cumulatively over the three years after the referendum.

Suggested Citation

  • Vieira Marques Da Costa, Rui & Dhingra, Swati & Machin, Stephen, 2024. "New dawn fades: trade, labour and the Brexit exchange rate depreciation," LSE Research Online Documents on Economics 124542, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:124542
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    Keywords

    Brexit; exchange rate depreciation; trade prices; labour outcomes;
    All these keywords.

    JEL classification:

    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • P25 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Urban, Rural, and Regional Economics

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