A weaker dollar doesn’t mean you’re earning less

By Felix Salmon
May 5, 2011
Matt Yglesias says that there's no difference between currency depreciation and real wage cuts:

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Matt Yglesias says that there’s no difference between currency depreciation and real wage cuts:

Your wages are denominated in dollars, so if the value of a dollar declines your real wages decline. Currency depreciation isn’t an alternative to real wage cuts, it’s a mechanism by which real wages can be cut.

This isn’t really true, unless you’re being paid in dollars and living abroad. On a trade-weighted basis, the dollar has declined by about 11% in the past 10 months or so. Does that mean that my real wages have fallen by 11% in less than a year? Should responsible employers wanting to keep their employees’ wages constant on a real basis have given them all an 11% pay hike in dollar terms? Of course not.

In order to convert nominal dollars into real dollars, you use inflation, not any change in the value of the dollar. When the dollar depreciates, sometimes that shows up in inflation — and sometimes it doesn’t. After all, the dollar has been depreciating pretty steadily for a decade now, without any sign of inflation picking up.

What a cheaper dollar does do is make US workers cheaper relative to their foreign competitors. That doesn’t mean those workers are taking a real wage cut, any more than productivity increases are real wage cuts. But it can still improve the quality of life here in the US. The Treasury secretary loves to intone that a strong dollar is in the national interest. And maybe in some senses it is. But in other senses, a weak dollar can be very useful indeed for boosting employment and growth.


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