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Employment, exchange rates and labour market rigidity

  • Fernando Alexandre

    ()

    (University of Minho and NIPE)

  • Pedro Bação

    ()

    (University of Coimbra and GEMF)

  • João Cerejeira

    ()

    (University of Minho and NIPE)

  • Miguel Portela

    ()

    (University of Minho, NIPE and IZA)

There is increasing evidence that the interaction between shocks and labour market institutions is crucial to understanding the dynamics of employment. In this paper, we show that the inclusion of labour adjustment costs in a trade model affects the impact of exchange rate movements on employment. We also explore how labour market rigidities interact with the degree of exposure to international competition and with the technology level. Our model-based predictions are consistent with estimates obtained using panel data for 23 OECD countries. Namely, our estimates suggest that employment in low-technology sectors that have a very high degree of openness to trade and are located in countries with more flexible labour markets are more sensitive to exchange rate changes. Our model and estimates therefore provide additional evidence on the importance of interacting external shocks and labour market institutions.

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File URL: http://gemf.fe.uc.pt/workingpapers/pdf/2010/gemf_2010-03.pdf
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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2010-03.

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Length: 41 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:gmf:wpaper:2010-03
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