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Employment, exchange rates and labour market rigidity

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://www3.eeg.uminho.pt/economia/nipe/docs/2010/NIPE_WP_2_2010.pdf
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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 2/2010.

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Date of creation: 2010
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Handle: RePEc:nip:nipewp:2/2010
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
Phone: +351-253604510 ext 5532
Fax: +351-253601380
Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
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  8. Cingano, Federico & Leonardi, Marco & Messina, Julián & Pica, Giovanni, 2009. "The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries," IZA Discussion Papers 4158, Institute for the Study of Labor (IZA).
  9. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations," NBER Working Papers 7862, National Bureau of Economic Research, Inc.
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  13. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
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  15. Ekholm, Karolina & Moxnes, Andreas & Ulltveit-Moe, Karen Helene, 2012. "Manufacturing restructuring and the role of real exchange rate shocks," Journal of International Economics, Elsevier, vol. 86(1), pages 101-117.
  16. Gómez-Salvador, Ramón & Messina, Julián & Vallanti, Giovanna, 2004. "Gross job flows and institutions in Europe," Working Paper Series 0318, European Central Bank.
  17. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
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  19. Addison, John T. & Teixeira, Paulino, 2001. "The Economics of Employment Protection," IZA Discussion Papers 381, Institute for the Study of Labor (IZA).
  20. John Driffill, 2006. "The Centralization of Wage Bargaining Revisited: What Have we Learnt?," Journal of Common Market Studies, Wiley Blackwell, vol. 44, pages 731-756, November.
  21. Giuseppe Bertola, 1991. "Labor Turnover Costs and Average Labor Demand," NBER Working Papers 3866, National Bureau of Economic Research, Inc.
  22. Pfann, Gerald A. & Verspagen, Bart, 1989. "The structure of adjustment costs for labour in the Dutch manufacturing sector," Economics Letters, Elsevier, vol. 29(4), pages 365-371.
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