The Effect of Exchange Rate Fluctuation and Foreign Direct Investment on Employment in Iran

Considering the importance of the effect of exchange rate fluctuation and foreign direct investment (FDI) on macroeconomic variables, such as production and employment, and with special attention to the employment issue in the developing countries (including Iran) which are encountered with problems associated with exchange rate fluctuation and unemployment for different economic and political reasons, this research studiesthe effect of real exchange rate (RER) fluctuation and FDI on employment in Iran during 1974-2009. To achieve this goal, long-term and short-term effects of this fluctuation were investigated through time-series analysis using Autoregressive Distributed Lag (ARDL) model and error correction model. In this research, the direct effects of RER, FDI, Gross Domestic Product (GDP), capital intensity and export penetration index on employment in Iran are studied.The asymmetric effect of RER on employment is also examined by separating positive and negative shocks incurred bythe former. The results indicate that anincrease in RER has a negative and significant effect on employment, so that a 1% increase in RER index causes an average decrease of 0.049% in employment and an increase in FDI has a positive and significant effect on it. The results are also indicative of asymmetric effects of RER fluctuation on employment in Iran.